Harold Lee Draper appeals from a reduction in his disability benefits. The reduction was made by the Social Security Administration in 1986 to offset an award to Draper of worker's compensation benefits. He argues that the Social Security Administration's initial decision in 1979 that there would be no offset is administrative res judicata, and bars the 1986 offset.

On June 26, 1978, Harold Lee Draper filed a claim for disability insurance benefits with the Social Security Administration (hereinafter "the Secretary"). The Secretary denied his application initially and upon reconsideration, and Draper appealed. Prior to the hearing of his appeal, Draper applied for worker's compensation benefits, which he began receiving on October 10, 1978, in the amount of $95 per week.

Sometime thereafter, a hearing was held before administrative law judge (hereinafter "ALJ") Borowiec. The record indicates that Draper informed ALJ Borowiec that he was receiving worker's compensation benefits.1 On April 9, 1979, ALJ Borowiec found that Draper was entitled to disability benefits, "subject to the appropriate statutory offset for workman's compensation paid." Section 224(a) of the Social Security Act, 42 U.S.C. Sec. 424a(a), provides for an offset against disability benefits for worker's compensation those benefits received (normally under state law) by the beneficiary. Generally, the offset applies when the total of an individual's benefits and worker's compensation exceeds eighty percent of his or her pre-disability earnings, and it reduces the federal benefits by the excess. The Secretary made an initial determination in 1979 that the statutory worker's compensation offset did not require any reduction in Draper's disability benefits.

Seven years later, on April 1, 1986, Draper entered into a settlement agreement of his state worker's compensation claim. Pursuant to this agreement, Draper received a lump sum of $39,500 in lieu of continued receipt of his $95 weekly payment. Draper notified the Secretary of this settlement. On September 11, 1986, the Administration informed Draper that his monthly benefits had been recalculated and that his disability benefits were subject to an offset for the worker's compensation settlement. The offset was held to be applicable only until Draper reached the age of 62, i.e., in March 1990. Draper filed a notice of reconsideration and the Secretary upheld its decision. Draper then requested an administrative hearing. ALJ Bork sustained the Secretary's determination. The ALJ rejected Draper's administrative res judicata argument for two reasons. First, he held that the conversion of the worker's compensation to a lump sum in 1986 was a new event and thus administrative res judicata did not bar a recalculation of benefits. Second, the ALJ held that, even absent the lump sum payment, the Secretary could correct the error and adjust the benefits prospectively, because the principles of administrative res judicata, 20 C.F.R. Secs. 404.987-404.989, apply only to prevent a retroactive recalculation of benefits. Draper appealed to the Appeals Council, which sustained the ALJ as to the issues relevant to this appeal.2

Draper filed an action in the district court for review of ALJ Bork's order. There he argued that the doctrine of administrative res judicata precluded the Secretary from reopening the 1979 offset determination, even though it might have been erroneous. The magistrate rejected Draper's argument and sustained the Secretary's decision. The district court adopted the magistrate's order with minor modifications. Draper now appeals. We reverse.

The Secretary presents two theories3 on appeal to support the decision of the Appeals Council: (A) First, the Secretary argues that the doctrine of administrative res judicata should not apply because the 1979 determination was not the "type of decision to which courts have attached res judicata," Secretary's brief at 14; and (B) Second, the Secretary argues that the conversion of the worker's compensation to a lump sum in 1986 constituted a "change in the amount" thereof under 20 C.F.R. Sec. 404.408(k), thus justifying a new calculation of the offset.

The Secretary argues that the 1979 determination--i.e., that Draper's benefits were not subject to the offset for worker's compensation--was not the type of decision to which administrative res judicata should apply, because in making that determination the agency was not acting in a judicial capacity and the parties did not have an opportunity to litigate the question of the proper amount of the offset. We reject the Secretary's argument. The Secretary has conceded in this litigation that the original calculation of Draper's benefits was an "initial determination" under 20 C.F.R. Sec. 404.902. Such an "initial determination" is expressly subject to the doctrine of administrative res judicata contained in 20 C.F.R. Secs. 404.987-404.989.4

Turning to the only theory which the Secretary has consistently urged in this litigation, we address the question of whether the lump sum settlement in 1986 constituted a change in the amount of Draper's workers compensation under 20 C.F.R. Sec. 404.408(k), thus justifying a new "initial determination." In addressing this question, it will be helpful to explore the relevant regulatory background.

As noted above, the determination in 1979 that Draper's disability benefits would not be reduced on account of his worker's compensation was an "initial determination." An "initial determination" is a determination made by the Secretary about a claimant's entitlement to benefits which gives the claimant the right to further review. 20 C.F.R. Sec. 404.900(a)(1); 20 C.F.R. Sec. 404.902. Determinations of entitlement or continuing entitlement to benefits, of the amount of benefits, or of a reduction in benefits due to the receipt of worker's compensation benefits are "initial determinations." 20 C.F.R. Sec. 404.902(a), (c), (e). An "initial determination" is binding unless the claimant requests a reconsideration within the statutory period or the Secretary revises or reopens the "initial determination." 20 C.F.R. Sec. 404.905.

Once review has been exhausted, a determination becomes final and may only be reopened under certain defined circumstances. 42 U.S.C. Sec. 405(h); 20 C.F.R. Secs. 404.987-404.989. This rule is known as the doctrine of administrative res judicata or administrative finality. Section 404.988 provides that cases may be reopened within 12 months for any reason, within four years for "good cause" as defined in the regulations, 20 C.F.R. Sec. 404.989, or at any time for the reasons set forth in subpart (c) of section 404.988.

The Secretary contends that administrative finality does not bar the recalculation of Draper's disability entitlement, because the recalculation of Draper's benefit was an "initial determination" on new facts, not a reopening. Not only is the Secretary required to reduce the disability benefits of any claimant who receives disability benefits from another source, 42 U.S.C. Sec. 424a(a); he is required to recalculate this offset whenever there is a "change in the amount" of those benefits. 20 C.F.R. Sec. 404.408(k).5 The Secretary argues that the lump sum settlement constituted a "change in the amount" of Draper's worker's compensation under the regulations, requiring a recalculation of Draper's disability benefits. The Secretary argues that this recalculation of Draper's disability entitlement was not a reopening of the 1979 determination, but rather was an "initial determination" based on new evidence about worker's compensation. Thus the Secretary argues that the initial determination in 1979 is not res judicata on the amount of offset.

The flaw in this argument lies in the Social Security regulations themselves, which provide that a lump settlement is to be prorated and treated as a periodic payment to the extent possible:

Public disability benefit payable on other than monthly basis. Where public disability benefits are paid periodically but not monthly, or in a lump sum as a commutation of or a substitute for periodic benefits, such as a compromise and release settlement, the reduction under this section is made at the time or times and in the amounts that the Administration determines will approximate as nearly as practicable the reduction [for the periodic benefit].

20 C.F.R. Sec. 404.408(g); see also 42 U.S.C. Sec. 424a(b) (providing that disability benefits reductions for lump sum payments shall approximate as nearly as practicable those for periodic payments). In Draper's case, the Secretary applied this regulation to his $39,500 lump sum settlement and prorated it at $95 per week, the same amount he had been receiving before the settlement. The settlement represented a change in the form of Draper's worker's compensation, but under the regulations it was not a change in amount. Therefore, the regulations did not authorize the Secretary to recalculate Draper's worker's compensation offset. Because the lump sum settlement was not a "change in the amount" of Draper's worker's compensation, the recalculation of Draper's offset was a second determination on the same facts. We therefore reject the argument that the 1986 recalculation was an "initial determination."

For the foregoing reasons, the judgment of the district court is REVERSED and the case is REMANDED to the district court with instructions to remand to the agency for further proceedings not inconsistent with this opinion.