Structured settlements are a unique tool available for all stakeholders in personal injury and workers’ compensation claims. Not only does a structured settlement allow these parties to reach efficient settlements, but they also provide all parties the necessary “win” in the case. Due to the different types of options, it is important to understand how you can maximize your settlement dollars through differing types of structures.
What are Structured Settlements?
A structured settlement is a tool that can be used by parties in a personal injury or workers’ compensation claim to reach a creative solution that benefits all parties. The “structured settlement” is an arrangement entered into parties where a settlement amount is paid out over a period of time via an annuity.
When using a structured settlement, it is important to be aware of the special tax rules that apply. A structured settlement must be established by:
- An agreement for a party to accept periodic payments for personal damages that are excludable from gross income as set forth in 26 U.S.C. §104 (a) (2); or
- An agreement for a party to accept periodic payments for applicable workers’ compensation benefits that are not considered income per 26 U.S.C. § 104 (a) (1); and
- The payments are also those as described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c) (2), or 26 U.S.C. § 130(c) (2).
These periodic payments must also be paid as follows:
- A party to personal injury type lawsuit or workers’ compensation claim; or
- A party who has assumed liability for the periodic payments under a qualified assignment per 26 U.S.C. § 130.
How are Structured Settlements Used?
In a typical structured settlement, an initial lump sum that is paid is referred to as “seed money.” Additional sums of money are then paid out usually on an annual basis, which is called “feed money.” These amounts are paid out at a fixed or variable interest rate. The terms of payout can also be negotiated through the life of the party or for a fixed period of years.
Benefits of Structured Settlements
Structured Settlements provide the necessary “win-win” dynamic that is important when trying to resolve troublesome personal injury and workers’ compensation claims. It also allows the parties to be innovative and collaborative in the settlement process where all parties can be involved.
In addition to these factors, the use of a structured settlement benefits the injured parties and insurance carriers.
Benefits to the Injured Party
When a person suffers a disabling personal injury, they are often left in a position where they are facing loss of income and future expenses that make financial planning a necessity. By using a structured settlement, an injured party has the following additional benefits:
- Flexible terms that include guaranteed or deferred income;
- Tax-free settlement monies, provided they meet the Internal Revenue Code criteria;
- Better interest rates than available in traditional savings or money market accounts; and
- Interest bearing annuity that provides payments in the future.
Benefits to the Insurer
There are also benefits to insurance carriers for using a structured settlement in a personal injury or workers’ compensation claims. Some of these benefits include:
- Creative settlement solution to provide for the future needs of person who may require future medical care, treatment, disability and/or loss of future earning capacity;
- Expedited resolution of claims—especially troublesome claims; and
- Provides for release of future liability by the carrier.
The use of structured settlements can also be used to fund Medicare Set-Asides in personal injury and workers’ compensation claims. This provides a “savings” to the employer and insurer and lessens the chance the Medicare Set-aside will be depleted prematurely.
Example of Savings through a Structured Settlement
A Hypothetical: The parties to a workers’ compensation settlement are struggling to settle a significant claim with the following factors:
– Claimant Projected Annual Medical Cost = $20,000
– Total MSA exposure = $552,600
| Cost to Fund MSA with Lump-Sum Payment = | $552,600 |
Instead of funding the MSA via a lump sum payment, the insurance carrier is able to use a structured settlement, which includes a rated age. The annuity has an initial payment (seed money) of $40,000, plus annual payments over the course of the annuity totaling $287,708. As a result, the followings savings are realized by the carrier:
| Cost of Fund MSA with Structured Settlement =
| $327,708 |
| Total Savings = | $224,892 |
Conclusions
There are clearly benefits to settling a workers’ compensation or personal injury claim through a structured settlement. However, the savings can vary depending on the type of settlement you use and other factors, including the use of a rates ages. It is important to consider these factors to maximize your settlement dollars—both real and perceived.
Author Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. http://reduceyourworkerscomp.com/about/. Contact: mstack@reduceyourworkerscomp.com.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.
