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Employment Structured Settlement Market Could Benefit from Withholding Solution

The lack of a withholding tax solution is a roadblock to many employment structured settlements. The IRS Private Letter Ruling obtained by IFS Corp addresses the tax treatment of the recovery, but the employment structured settlement solution still must address how to address the withholding issue.

Like a traditional structured settlement, a structured settlement used to resolve an employment liability involves a promise to pay future payments over time by the employer, or its insurer. Such an obligation is then assigned by way of a non qualified assignment to an assignee who takes on the obligation and the funding amount and purchases an annuity of funding agreement to fund its obligation.

If the case involves elements of back pay or front pay, there is an obligation to pay withholding for both the employer and the employee portions. This might include federal state or local taxes, in addition to social security. The amounts to be withheld may vary depending on the number of exemptions taken and the general availability of tax rates. These may of course have a further potential to vary from time to time after inception. Neither the assignees nor the annuity issuers currently sponsoring such employment structured settlement annuities want to take on that administrative role. Employers fear that the burden cannot be shifted and want to avoid the cost of participating in hearings or other tribunals if things don't work out as the plaintiff intends. Not to mention the fact that penalties for failing to withhold are severe.

There seems to be an opening for an innovative company to come up with a withholding solution. That would indeed grow the structured settlement industry.

Note: There are many other elements of employment related settlements that lend themselves to employment structured settlements.

Structured Settlement Internal Rate of Return

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Define structured settlement internal rate of return. If you asked the question of different structured settlement consultants would they come up with different answers?

What is structured settlement IRR?

The structured settlement internal rate of return is the result of a mathematical formula that generates an interest rate that is equivalent to the effective compounding rate on invested capital (i.e. the structured settlement funding amount or premium).

How is structured settlement IRR useful?

Once you know the internal rate of return of the structured settlement proposal, you can compare it to after-tax rates that you might earn by opting for other structured settlement plans, or that you might achieve by taking cash and investing in different taxable or tax-exempt financial instruments.

Caveat 1

To calculate the structured settlement IRR you need the following components

• Consideration (amount of initial investment)
• Amount and timing of each cash flow

The results can be very easily misinterpreted and/or misrepresented.

Care should be taken by Plaintiffs and counsel to understand how the IRR is calculated in a structured settlement proposal where lifetime payments are being considered, and there is a plaintiff /annuitant with reduced life expectancy, so an effective comparison can be made.

For example a structured settlement planner quotes an annuity that will pay a 30 year old paraplegic $4,000/month for life with 300 monthly payments certain and tells you that the rate of return is 5.75% tax free. What is wrong and/or missing from the planner's statement?

Answer:
If the structured settlement planner has simply quoted the IRR off the insurance company software, chances are high that the IRR is a number achievable only if the plaintiff lives through normal life expectancy (NLE). If the plaintiff dies before 300 monthly payments are paid, the most that could be paid out is the 300 monthly payments. Therefore when using the IRR to evaluate the "opportunity cost" one should also assess what the IRR would be if the plaintiff dies within the certain period. Because a plaintiff may live longer than normal life expectancy the most useful opportunity cost analysis would include the IRR calculated at various hypothetical "live until" ages.

Caveat 2
When comparing the IRR on alternative investments to a structured settlement IRR, be sure that the IRR on the alternative investment  takes into account all investment charges including, if applicable, surrender charges and commissions on both the acquisition and disposal (buying or selling) of the alternative investment.

In a September 20, 2007 published opinion, in response to this author's inquiry, the New York State Insurance Department stated that "although there is no affirmative requirement that an agent or broker substantiate a claimed rate of return, the Insurance Law prohibits the making of misleading statements or misrepresentations regarding life insurance and annuities".

Further Reading

The Internal Rate of Return: Economics Interactive Lecture Samuel L. Baker University of South Carolina  Arnold School of Public Health March 28, 2006

Non Qualified Structured Settlements Private Letter Ruling

Non qualified assignments have been concluded in thousands of non personal injury cases since Liberty Mutual introduced the BARCO program in the late 1990s. Allstate and Prudential versions of the non qualified assignment program soon followed. Today non qualified assignments are used in a wide variety of situations , including the resolution of employment cases.

Even with a large number of cases concluded, there was always the feeling that a larger number of claimants and their attorneys would feel comfort is there was a definitive IRS ruling.

Integrated Financial Settlements, the holding company for a number of NSSTA member companies, today announced such a favorable Private Letter Ruling, or PLR, which while based on an employment claim, opens the door to using periodic payments to resolve a multitude of taxable claims, such as non-physical injuries, fraud, slander, wrongful imprisonment and other types of claims not excluded from income under the Internal Revenue Code.

According to press release, the PLR was requested on behalf of a client with an employment claim stemming from a hostile work environment. Had the claim been paid out in a lump sum,  as is so often the case, most of the settlement would have been lost to taxes; instead, a series of periodic payments, via a non qualified assignment, will provide the claimant with a secure, tax-deferred income stream, specifically tailored to the claimant’s future needs.

IFS is to be commended for seeking the ruling. Others in the structured settlement and settlement planning industry are encouraged to invest in the business and to seek such rulings which benefit all parties and the industry. If you have a unique situation and the tab seems too much to bear, don't wish to invest your own money consider partnering up with other firms in the common interest.