by John Darer® CLU ChFC MSSC RSP CLTC
Long Term Disability Claim Structured Settlements are a better way to settle employer paid LTD Claims
What is LTD Insurance?
LTD or long term disability insurance is an insurance policy that protects an employee from loss of income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time. The ability to earn an income is a valuable asset and many people choose to protect it though disability insurance. It can be paid for by an employer, partially paid for by the employee or an individual can purchase individual coverage.
How Are LTD Benefits Taxed?
IRC §104(a)(3) provides a tax exclusion for amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer)
Simply said, individually paid LTD benefit payments are tax exempt while Employer paid LTD benefit payments are taxable.
Group LTD Disability Settlement Offers Need to Be Reviewed Carefully
- Your employer or its group LTD insurer may offer a lump sum disability settlement. What this means is that you are being offered the present value of all or a portion of your future monthly disability benefits.
- This calculation provides the insurance company with a discount for paying you a lump sum settlement today, as opposed to paying out monthly benefits over the course of time.
- A lump sum settlement on an employer-paid Group LTD plan is also fully taxable. It’s important to take in to account that the discounted lump sum you are being offered, is further discounted by taxes and applicable attorney fees. For some people such a settlement could expose them to the Alternative Minimum Tax (AMT). An LTD Structured Settlement is one way to mitigate this problem.
Group LTD Structured Settlement Using a Non-Qualified Assignment
We offer a solution for both insured and sell-insureds through Liberty Life Assurance Company of Boston, in conjunction with BARCO Assignments Ltd. (BARCO), utilizing a non-qualified assignment for all structured long-term disability settlements.
- Allows the Group LTD insurer/employer to be fully released from the future periodic payment obligation
- Provides the claimant with a customized stable income stream.
- The periodic payments are funded through the purchase of an annuity from Liberty Life Assurance Company of Boston. A Liberty Mutual Insurance Company guarantee backs up Liberty Life Assurance Company of Boston
- Liberty Life is able to accommodate scenarios where the insurance is fully or partially employee paid and will provide applicable tax reporting. If a claimant is to receive both taxable and non-taxable payments, two contracts will be issued, one for each type.
Benefits of Structured Settlements on LTD Claims
For both taxable and nontaxable disability settlements, structured long-term disability settlements
- may assist both claimant and insurer in successfully bringing resolution to a claim.
- customized payout. Payment can be made monthly, annual, immediate, deferred, fixed cost of living adjustments and lifetime income streams.
For taxable disability settlements, structuring long-term disability settlements
- an opportunity to receive income in a more tax-efficient manner.
- greater overall payout than would otherwise be achieved with a single, lump sum settlement
- avoidance of escalation into higher tax brackets
- preservation of deductions that may be lost at higher income levels
- avoidance of the alternative minimum tax (AMT)
How Do You Deal with Tax Reporting When an Employer Paid Disability Settlement is Structured?
- Per IRC §3504, Liberty Life Assurance Company of Boston will execute an agent agreement with each employer or disability carrier who enters into settlement agreements funded by Liberty Life annuities via Form 2678. Many disability insurers already have these in place with Liberty Life.
- Estimated turnaround time with the IRS, if there is no Form 2678 in place. Please contact us in advance so we can verify whether an agent agreement is already in place with a particular insurer.
- In accordance with IRC Section 3504, Liberty Life will complete a quarterly filing of Form 941 and Schedule R to report wages paid.
- Liberty Life will issue a Form W-2 annually in connection with the payments to the claimant.
For more information call John Darer at 888-325-8640