THIS POST IS PART OF A MONTH-LONG SERIES ABOUT MEDICARE SET-ASIDES. WE WELCOME YOU TO CONTACT OUR COMPREHENSIVE SETTLEMENT PLANNING FIRM, MILESTONE CONSULTING, WITH ANY QUESTIONS OR TO SEEK ADVICE ABOUT MSAs.
If you’re a Medicare beneficiary about to reach settlement in a personal injury case, you may be already talking with your attorney and a settlement planning expert about establishing a Medicare set-aside (MSA).
There are generally two options for funding an MSA: either with a lump sum or a structured arrangement. If you go with the latter, 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. Utilizing a structured arrangement also comes with benefits that funding with a lump sum cannot provide.
Option 1:Single Premium Immediate Annuity
The Single Premium Immediate Annuity (SPIA) is essentially a lump sum of money 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.
The SPIA allows a little more time and flexibility than other options. 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 a structured settlement annuity (see Option 3), many plaintiffs establishing an MSA find 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.
Option 2: Cash
Another benefit of a SPIA is that it offers living commutation, meaning the ability to commute all or a portion of the annuity’s present value during the beneficiary’s lifetime. If the Centers for Medicare and Medicaid Services (CMS) changes any guidelines for MSAs, the plaintiff will not be locked into an immutable structured settlement annuity contract.
Option 3: Structured Settlement Annuity
A structured settlement annuity (SSA) 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.
Both SSAs and SPIAs offer considerable cost and tax savings over using a lump sum to fund an MSA. If an MSA is the right option, 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.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).