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Avoiding the Child Support - Supplemental Security Income Trap

Avoiding the Child Support - Supplemental Security Income Trap

May 22, 2024

Supplemental Security Income (SSI) is a federal program that provides cash assistance to people with disabilities who have very limited incomes and resources.

In most cases, SSI recipients may also obtain a much more important benefit automatic Medicaid eligibility. Because access to SSI depends on a beneficiary's income and resources, even small increases in income can cause a reduction or loss of SSI benefits.

Unfortunately, when an SSI beneficiary's parent is ordered to pay child support, those payments can end up ruining the beneficiary's access to government benefits.

Child Support Payments as Unearned Income

Child support payments are a problem for SSI recipients because the Social Security Administration (SSA) treats a substantial portion of a child support payment as unearned income for purposes of calculating SSI benefits. Receipt of unearned income results in a dollar-for-dollar reduction in an SSI benefit.

So, for instance, an SSI beneficiary who receives $200 in unearned income has their SSI benefit reduced by $200 in the month that the income is received. If the amount of unearned income is greater than the entire SSI benefit (for example, when someone has a $500 monthly SSI benefit and they receive $600 in unearned income), the beneficiary loses SSI, and, potentially, Medicaid.

Fortunately, the SSA does not always count an entire child support payment as unearned income. If a child support recipient is younger than 18 (or 22, if they are still in school), and if the recipient receives the payment from an absent parent (defined as a parent who does not live in the same household as the child), then the SSA considers only two-thirds of the payment as unearned income. However, this is small consolation for an SSI beneficiary who has their assistance reduced or terminated despite the one-third break.

How to Handle Child Support for Child With Special Needs

There are several ways to handle child support for a child with special needs. If the amount of the child's SSI benefit is clear at the time of the divorce, it may be possible to agree upon a child support settlement that reduces, but does not eliminate, SSI.

(Of course, the benefit of receiving SSI and Medicaid has to be weighed against the advantages of a larger child support payment. In some cases, it may be better to forgo SSI and receive a larger child support award instead.)

In other cases, it may make sense to create a First Party special needs trust for the child's benefit. The court can then order the noncustodial parent to make support payments directly into the First Party special needs trust. The trust will shelter the income and allow the child to retain SSI benefits, and, in many cases, the support payments can be retained in the trust if not immediately used.

Unfortunately, these particular First Party special needs trusts are not perfect because they must contain a "payback provision" that allows the government to recover its Medicaid expenses from the unused assets in a deceased SSI beneficiary's trust. However, if properly managed, there may not be a large sum remaining in the special needs trust when the beneficiary passes away.

If you are in the middle of a divorce, or if previously agreed-upon child support payments are wreaking havoc with your child's SSI benefits, talk to a special needs planner.