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| Milestone Consulting, LLC

We recently discussed the two options for funding a Medicare Set-Aside—either with a lump sum or a structured arrangement. Utilizing a structured arrangement provides benefits that aren’t realized with a lump sum. As my colleague explained in the post,

“If a structured arrangement is utilized to fund a WCMSA, the claimant is required to make an initial deposit in an amount equal to the first surgical procedure or replacement and two years of annual payments. After the initial deposit, the structure is designed to allocate regular deposits over a designated period of time. Once the funds are exhausted in a given period, Medicare will pay primary for further injury-related expenses during that period.

There are two common types of structured arrangements that are ideal for funding MSAs: structured settlement annuities and single premium immediate annuities. Both options can create a considerable cost savings over funding with a lump sum.

Option 1: Structured Settlement Annuities (SSA)

A structured settlement annuity is a financial solution that allows the injured party a means of deferring part, or all, of the settlement, which provides significant tax advantages.

Per the terms of the settlement agreement, the defense directly purchases an annuity from a life insurance company, which then uses the funds to replenish the MSA account for the plaintiff, plus interest, through a series of annual payments across a set period of time.

The plaintiff should choose to engage a settlement expert who can co-broker the annuity purchase with the defendant to ensure that the annuity pricing, product selection, and document process are performed within the best interest of the plaintiff.

Option 2: Single Premium Immediate Annuities (SPIA)

The SPIA operates much the same as a SSA—it is essentially a lump sum of money that is used to purchase an annuity from a life insurance company, who, in exchange, funds the MSA account. The payments are made annually over a specific period of time.

Unlike a SSA, in which the money must be paid directly from the defendant’s insurer to purchase the annuity, the SPIA allows a little more time and flexibility. Money can be paid from the defendant to the plaintiff, who is then able to purchase the annuity.

Although the SPIA does not offer the same tax-free advantages of the SSA, many clients establishing MSA arrangements find that they have little or no tax liability because of low income bracket and the potential offset due to IRS Code Section 213(d) medical deductions.

For instance, let’s say that a client needed a $100,000 Medicare Set-Aside account, spread over 5 years. The client is in the 15% tax bracket, so the annual taxes on $20,000 would be $3,000/year or only $250 a month.

Additionally, medical expenses may be tax-deductible using an itemized deduction. Total medical expenses in excess of 7.5% of an individual’s adjusted gross income can be deducted. The 7.5% threshold will increase to 10% of adjusted gross income for the 2103 tax year.

Another added benefit of a SPIA is that it offers living commutation (the ability to commute all or a portion of the annuity’s present value during the client’s lifetime). If the Centers for Medicare and Medicaid Services (CMS) changes any guidelines for MSAs, your client will not be locked into an immutable structured settlement annuity contract.

Both SSAs and SPIAs offer considerable cost and tax savings over using a lump sum to fund a Medicare Set-Aside. Finding an expert to assess both options will ensure that the most cost-effective solution has been selected, and that the plaintiff can focus on recovery.


Related Posts:

Funding a WCMSA: Lump Sum vs. Structured Arrangement

Medicare Set-Asides: What an Allocation Firm May Not Tell You

Medicare Set-Asides: Four Steps to Consider

One Comment

  1. Gravatar for Casual Observer
    Casual Observer

    They are also able to apply an exclusion ratio, which prevents the original investment amount from being taxed.

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