When a life-altering workplace injury leaves your client unable to work, navigating the complexities of a workers’ compensation settlement becomes paramount. For James, a married man with a back injury from a work site accident, the resolution of his case was not just about covering medical bills; it was about securing his future. His recovery, which totaled $446,000, is a prime example of how a Medicare Set-Aside (MSA) funded by a structure and a second annuity can unlock significant added value from a workers’ compensation settlement.
The Foundation: Structured Settlements and Medicare Set-Asides
A critical component of many workers’ compensation settlements is the Medicare Set-Aside. Medicare requires its interests to be “under consideration” if a settlement involves past, current, or future medical expenses. Failing to do so can jeopardize future Medicare benefits or expose both you and your client to fines and penalties.
The most prudent method for properly recognizing Medicare’s interests is through an approved MSA arrangement. An MSA precisely details the amount of money from a settlement that should be set aside to meet Medicare’s future medical interests. While CMS reviews are often triggered by specific settlement thresholds (e.g., $25,000 for Medicare recipients, or $250,000 for those expected to become recipients within 30 months), considering an MSA is generally recommended whenever future medical benefits are involved.
Funding an MSA with a structured settlement is widely considered the best-practice solution. Structured settlements are designed to fulfill the specific obligation set up to satisfy Medicare. This method provides confidence that Medicare’s interests are properly addressed, while often offering more spendable dollars for future needs than a lump sum cash settlement.
In James’ case, his WCMSA total of $261,339 was funded by initial cash “seed money” of $46,191 and an annuity providing $17,929 annually for 12 years, resulting in a total payout of $215,148 from that annuity alone. Thanks to the structured settlement, the MSA obligation will be met for less money, leaving more dollars for James.
Beyond the MSA: The Game-Changing Second Annuity
While the MSA structured settlement addresses future medical needs, James’ case exemplifies a less common, yet incredibly powerful, strategy: the second structured annuity. This second annuity, negotiated between the settling parties, provided James with additional annuity income for 12 years, starting immediately.
Here’s a breakdown of the financial impact in James’ case:
- Total Settlement: $446,000.
- WCMSA Funded: An annuity providing $261,339 in total payout over time for medical expenses.
- Second Annuity: An additional $968 monthly for 12 years, totaling $139,398 in payout.
- Cash to Injured Party: Approximately $150,000 for attorney fees, expenses, and personal use.
What makes this particularly impactful is the financial leverage it provides. The combined cost to fund both the MSA annuity and the second annuity, plus the initial MSA seed money, was $296,772. Yet, this investment generated a total payout of $400,737 in tax-exempt income from the annuities alone (MSA benefits + second annuity benefits), alongside the $150,000 cash distribution. Bottom line: $550,737 will be paid out over time from a $446,000 settlement, demonstrating how structured settlements can stretch settlement dollars far further than a lump sum.
The Distinct Advantages of a Second Structured Annuity
A second structured annuity offers benefits that go well beyond simply satisfying Medicare’s interests:
- Tax-Free Income: The income received from these annuities is tax-free, an advantage over traditional retirement vehicles like a 401 (k) or IRA, where distributions are typically taxed.
- Guaranteed Returns: These annuities offer guaranteed rates of return. For example, a 4.8% tax-free return can be equivalent to a 7.7% taxable return, depending on the recipient’s tax bracket. The structured annuity offers predictable, secure growth —a critical factor in volatile market environments.
- Supplementing Household Income: For individuals like James, who are unable to work, a second annuity provides a crucial and consistent income stream, directly supplementing household income with no strings attached on how the claimant uses the money.
- Protection from Creditors: Structured settlement annuities possess a unique characteristic: they are generally protected from judgments and creditors, adding an extra layer of financial security for the recipient.
- Customizable Design: The annuity can be designed to meet specific needs, including deferring payments until retirement age (e.g., 62), effectively acting as a long-term retirement supplement for those who may not have other retirement plans.
- Addressing “Sudden Wealth” Challenges: Many individuals receiving large settlements are not accustomed to managing significant sums of money. A structured annuity offers a responsible way to manage funds over time, preventing reckless spending or exploitation by others, which is a common problem associated with sudden wealth.
“This case has always had the potential for the injured worker to be taken advantage of by family members had there been a large lump sum payout to him as a part of the settlement,” said his attorney, Kimberly J. Syfrett, of the Panama City law firm Syfrett, Dykes & Furr.
“My client is a kind man with little education and generous to his own detriment at times. The opportunity to set up a second annuity providing him with a tax-free stream of income ensures the settlement money will cover living expenses for his lifetime and helps me know this structured settlement will truly be in his best interest for the long term,” she said.
Secure Your Client’s Future
The use of a second structured annuity in a workers’ compensation settlement is not as common as it should be. It is often overlooked in favor of immediate cash distribution after the MSA. However, for injured workers like James, it provides a powerful, tax-free, and protected income stream that significantly enhances long-term financial security.
The big takeaway here: Structured settlements offer far more than just funding Medicare Set-Asides. They provide a customized settlement plan that can deliver hope and a secure future for injured people. Considering the full potential of structured settlements on your next workers’ compensation case, including a second annuity, could dramatically improve the financial outlook for your client.
Ringler Settlement Consultants:
• William Mathews III (wmathews@ringlerassociates.com – (813) 431-7533)
• Scott Hoover (shoover@ringlerassociates.com – (407) 478-6622)
• Jeffrey Klugerman (jklugerman@ringlerassociates.com – (954) 349-2033)
Ringler is the largest settlement planning company in the United States, with over 250 professionals in more than 70 offices nationwide since it was established in 1975. More at www.RinglerAssociates.com.