Structured settlements offer all parties in workers’ compensation cases an opportunity to maximize the settlement value of the case and have creative solutions to solve complex problems. Before using a structured settlement in your case, it is important to understand key terms and how they work.
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Key Structured Settlement Terminology
The use of structured settlements include a complicated vernacular. Using terms incorrectly can result in delay or having a settlement fall apart. Consultation with a structured settlement representative is key.
- Annuitant: A person who receives the benefits of an annuity.
- Annuity: A specified income payable at stated intervals for a fixed or a contingent period, often for the injured employee’s life.
- Beneficiary: The injured employee who receives the payments from the structured settlement.
- Deferred Lump-sum Payments: These are payments to the injured employee, which are larger than the regular periodic payments, and are given at pre-determined dates in the future to cover the cost of a college education, car replacement, home remodeling, etc.
- Flexible Settlement Plan: A structured settlement that takes into consideration the needs of the injured employee, both financially and medically, while also addressing the cost of the structured settlement. A flexible settlement plan includes the planning necessary to achieve the goals of the injured employee while maintaining control of the cost of the structured settlement for the employer/insurer.
- Period Certain Annuity: When the injured employee knows that in the future there will be additional income from Social Security, a pension, IRAs, 401Ks, etc., the injured employee may elect to get larger payments from the structured settlement annuity by shortening the time period the annuity will be paid to age 65 or some other cut-off point.
- Periodic Payments: Settlement payments that the injured employee receives based on an agreed payment schedule, whether it bi-weekly payments, or monthly payments, or quarterly payments or annual payments.
- Qualified Assignment: A qualified assignment is the transfer from the workers’ compensation insurer to the life insurance company, the obligation to pay the future periodic payments of a structured settlement. The obligation to pay qualifies for favorable income tax treatment as the obligation arises out of an injury.
Correctly Using a Structured Settlement
The use of structured settlements is made possible by special provisions within the Internal Review Code. When done properly, they can provide a claimant with a consistent flow of money that is not taxable under the Code.
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.
Conclusions
Structured settlements remain an important tool in settling workers’ compensation cases. It is important to understand key terminology and how they work before using one in your settlement.
Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a monthly basis working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: [email protected].
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