Workers’ Compensation and Structured Settlements

When employees suffer injuries or illnesses due to their job, they may be entitled to benefits through a special type of insurance from their employer. This state-mandated insurance program is known as workers’ compensation, sometimes also called “workmans’ comp”.

More than 90% of all U.S. workers are covered by workers’ compensation laws. Each state has different regulations for which employers must have coverage and which types of workers are excluded from the requirement.

Though workers’ compensation insurance covers many potential situations, keep in mind that coverage may be denied if an employee suffers an injury specifically because they were intoxicated, breaking the law or otherwise violating company policy at the time.

In order to receive workers’ compensation benefits, an injured employee must waive the right to sue their employer. However, if the harm was caused by the negligence of an employer or a third party, the employee does have the option to bypass the workers’ compensation system and file a personal injury lawsuit.

Family members of workers killed on the job may be eligible for benefits as well. Claims can be resolved through lump sum cash payouts, trust funds or structured settlements.

In cases where an employee is permanently disabled to the point that they cannot return to meaningful employment, the workers’ compensation claim is often resolved through a structured settlement. A structured settlement annuity guarantees the disabled employee a long-term stream of tax-free, inflation-protected income.

When an annuity is chosen as a settlement, a structured settlement broker helps analyze the employee’s needs to determine how the periodic payments should be made. Around one-third of injured persons choose this option over a cash lump sum, according to the National Structured Settlements Trade Association. The federal government has encouraged the use of structured settlements through legislation since 1983, because such arrangements usually work to the advantage of everyone involved.

A seriously injured employee may face costs for ongoing medical treatment, future surgeries and the replacement of durable medical equipment for the rest of their life. On top of that, they may never be able to earn an income from working again.

Given these challenges, even a multimillion-dollar lump sum payout can run out quickly if it is not managed and invested with great care. A settlement recipient’s future is much better protected when the money is placed into an annuity that generates regular tax-free income. The only downside is that the settlement money cannot be accessed ahead of schedule unless the rights to future payments are sold on the secondary annuity market.

By paying the annuity provider up front to handle the long-term payments, the employer can expedite the settlement process and take advantage of the full tax-deductibility of the settlement amount as if it were a lump sum.

The state benefits because a structured settlement makes it less likely that the injured employee will rapidly spend their entire workers’ compensation award and run out of money. Without the settlement funds, the injured employee would have to turn to Medicare, Medicaid or other public aid to cover health-care and living expenses.

A structured settlement can also be used to fund a Workers’ Compensation Medicare Set-Aside (MSA) account, where the employer is responsible for the cost of the primary medical treatment for the claimant, and Medicare is the secondary payer.

If you are a medicare beneficiary and you are considering a structured settlement, you should have the Centers for Medicare and Medicaid Services (CMMS) review the settlement before your case is closed. A CMMS review will ensure your settlement accounts for Medicare-covered expenses. This is typically achieved by opening a MSA account.

A CMMS review will make your settlement compliant with Medicare laws, and it will also ensure Medicare will cover your expenses if your medical condition changes unexpectedly and you no longer have enough funds in your MSA.