Lukhard v. Reed

Background

A group of low-income families who had received personal injury or workers’ compensation awards sued after Virginia’s social‑services agency treated those lump-sum payments as “income” and cut their Aid to Families with Dependent Children (AFDC) benefits. Virginia adopted the rule after a 1981 federal change that made the income/resource distinction more important. A federal district court and the Fourth Circuit sided with the families before the Supreme Court agreed to resolve the split among appeals courts.

Reasoning

The central question was whether money from personal injury awards can be counted as income when deciding AFDC eligibility. The Court said it can: “income” may mean any money that comes in, and federal Health and Human Services practice had long allowed States some latitude. The Court relied on that administrative interpretation and on the reasonableness of treating awards that compensate for lost wages or otherwise increase a family’s pecuniary well‑being as income. The Court also rejected the argument that such awards must be treated only as resources and reversed the Fourth Circuit’s contrary decision.

Real world impact

Because of the ruling, States may lawfully count personal injury settlements as income and apply the statutory ineligibility period, which can suspend AFDC payments for several months. The decision lets States and the federal agency shape how lump sums affect welfare eligibility, and Congress and HHS later adjusted rules to allow certain deductions or shortened ineligibility periods. Families receiving awards should expect state-by-state differences in how benefits are handled.

Dissents or concurrances

Justice Blackmun concurred only to defer to the federal agency’s interpretation. Justice Powell (joined by three Justices) dissented, arguing awards are compensatory and counting them as income can impose unfair hardship on needy families.