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A non-qualified assignment (NQA) is an assignment of an obligation to pay money in the future — a structured plan — in cases that do not involve bodily injury.  The assignments are designed to handle funds from settlements in non-personal injury cases, including (but not limited to):

  • Employment litigation such as wrongful termination, discrimination, sexual harassment, etc.
  • Environmental issues
  • Construction defects
  • Contract disputes
  • Directors and officers (D&O) and errors and omissions (E&O) claims
  • Punitive damages
  • Attorney fees from non-personal injury cases

With an NQA, a plaintiff can reap the benefits of financial planning by spreading their settlement over a long period of time instead of receiving it in one lump sum. An NQA offers the opportunity to spread the tax burden and control the timing of the receipt of income.

Personal injury settlement payments are considered “qualified” because they are not subject to income tax.  Qualified typically means that the process of setting up the structure qualifies under IRC section 130 and 104, and it is either a personal injury case or a workers compensation case.  In short, tax exemption on earnings from a settlement requires some kind of bodily injury as defined by the IRS.

In a 2005 article, Robert W. Wood, J.D. sums it up perfectly:

Rev. Rul. 2003-115 considered the assignment of nontaxable periodic payments to an assignment company. Although the periodic payments were qualified settlement payments under Sec. 130(a) otherwise nontaxable under Sec. 104(a)(2), the ruling analyzed the assignment of the payments to an assignment company in light of the constructive receipt and economic benefit doctrines. That ruling seems to indicate that there should be no constructive receipt in the context of nonphysical injury structures that employ assignments, because the claimants have made irrevocable elections as to their periodic payments while their control of the receipt of the payments was subject to substantial limits or restrictions. This reasoning suggests that an assignment company should be able to assume responsibility for making nonqualified (and taxable) settlement payments on behalf of a defendant insurance company if the settlement documents’ restrictions are followed.”

Because settlement is, by nature, the end of litigation, many litigants do not think about their taxes until it’s too late. Getting the right people in the room to give you sound advice is the best way to ensure a settlement is as valuable as possible.

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