The Periodic Payment Settlement Act protects owners of structured settlements who received a large sum of cash from spending quickly and unwisely, and not using it for long-term security.
The federal government created the Periodic Payment Settlement Act (PPSA) to protect claimants, who received a cash sum as a result of personal injury and wrongful death lawsuits, from quickly depleting their assets, and falling on public assistance to meet their needs.
Insurance industry statistics from The Rutter Group show that 25 to 30 percent of accident victims use all the funds from their judgments within two months of recovery, and 90 percent exhaust the money within five years. The PPSA protects claimants from these losses.
By providing tax-free incentives, the PPSA promotes the use of structured settlements, a type of annuity that converts a one-time award from lawsuits into a series of income payments that can last up to the entire lifetime of a claimant. In a trial judgment, these kinds of settlements are known as periodic payment judgments.
The National Structured Settlement Trade Association reports that since the PPSA was signed into law, more than 500,000 injury victims have settled their accident or wrongful death cases with structured settlements.
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Structured settlements were first popularized in Canada around the 1960s as a way of handling payments from settlements involving thalidomide. German pharmaceutical company Grünenthal manufactured the drug to ease morning sickness, but the sedative resulted in severe, life-threatening birth defects.
The settlements from lawsuits against the German drugmaker were not ideal for covering long-term medical costs. Instead, a payment stream would address a client’s needs better than a lump-sum payment.
Although structured settlements for thalidomide claimants started in Canada, similar cases were later filed in the U.S., which popularized the use of structured settlements in medical malpractice disputes.
President Ronald Reagan in January 1983 signed the Periodic Payment Settlement Act (PPSA), which promotes the use of structured settlements as a means of providing long-term, tax-free financial security to victims seriously injured in accidents and their families. It is now part of the Internal Revenue Code (IRC).
As a result of enacting the PPSA, structured settlements were granted a distinct economic advantage over lump-sum payments for the recipients of damage awards. Not only is the principal tax-free, but so is the interest.
The PPSA lets claimants exclude any money received for physical injuries, sicknesses or workers’ compensation cases as gross income on their tax returns, regardless of whether the money is paid out in a lump sum or over a period of time.
The amount received for agreeing to the assignment of the liability to pay damages, and the income on the annuity that funds the liability to pay those damages are not subjected to tax implications.
That also applies to the method of payment. It does not matter if the periodic payments are from a third party, like an insurance company that frequently makes these payments to recipients.
Over time, the interest on the money in the annuity is able to accrue without deducting taxes. For annuities that are not part of settlements, this interest would be considered income earnings and taxed.
Structured settlements provide long-term financial security. A structured settlement broker provides resources and sets up the contract according to the court’s needs, making sure the contract helps with the costs of medical, living and family-related expenses over time.
The stress and time-consuming nature of choosing multiple investments makes lump-sum settlements inconvenient in many cases. Investments may result in losses, leaving the claimant with unpaid medical bills.
The PPSA helps to prevent claimants from facing challenges that may accompany receiving a lump-sum cash payment without the structure of an annuity. These challenges include:
The PPSA further codified a federal level the tax-free status of structured settlements.
The PPSA amended IRC Section 104(a)(2) of the tax code to further codify that the full amount of money given in a structured settlement are in fact damages and thus tax-free. IRC Section 104(a)(2) states that periodic payments after sickness or personal injury constitute damages that are tax-free to the injured party.
Part of the legislation means that for a structured settlement to maintain its tax-free status, payments to an injured person could not be “accelerated, deferred, increased or decreased by the recipient.” Any changes to the agreed settlement would nullify the contract’s tax advantages. This, however, does not mean that selling a portion of your payments automatically changes the tax free status of future payments.
As long as the sale of a payment stream complies with applicable federal and state laws, you should not incur tax penalties. However, settlement owners should consult with an independent tax adviser regarding possible tax implications of their sale.