The Internal Revenue Service (IRS) has issued a Private Letter Ruling (PLR-143928-13) dated August 29, 2014 approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index which also includes the possibility of a commutation by the Claimant pursuant to a Notice of Hardship Conversion. A copy of the PLR is posted on the structured settlement wiki.
Although PLRs do not identify requesting taxpayers, knowledgeable industry sources have identified Pacific Life as the product provider. A PLR is directed only to the taxpayer requesting it and may not be used or cited as precedent.
Pacific Life previously announced its Index-Linked Structured Settlement Adjustment Rider and has published a product brochure describing its features and benefits. The PLR describes the following three step formula by which Pacific Life adjusts applicable periodic payments on each annual payment anniversary:
- "Step 1 determines the index return, which equals the ending S&P 500 Index Price minus the starting S&P 500 Index Price divided by the starting S&P 500 Index Price.
- "Step 2 determines the adjustment, which is the lesser of the Index Return or [a percentage cap]. If the Index Return is less than or equal to zero, the adjustment will be zero.
- "Step 3 determines the annuity payment amount."
As to the Index-Linked feature, the PLR concludes:
- The periodic payments "are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index"; and
- The structured settlement indexed annuity "will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of annuity’s variable payments."
For additional information about equity-indexed annuities and the Pacific Life Index-Linked Adjustment Rider, see this prior S2KM blog post.
Hardship Conversion Feature
The Hardship Conversion feature potentially represents a structured settlement industry "game changing" development. With the exception of Allstate and Symetra, each of which has exited the structured settlement primary market, no annuity provider, to S2KM's knowledge, offers its structured settlement annuitants a secondary market option.
Although Pacific Life has not previously announced or offered a structured settlement Hardship Conversion, industry sources have informed S2KM they anticipate Pacific Life will begin offering a Hardship Conversion for all of its structured settlement annuities beginning in 2015.
The PLR describes the Hardship Conversion feature as follows:
"The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."
As to the Hardship Conversion feature, the PLR concludes:
- "The possibility of a commutation by Claimant pursuant to the Notice of Hardship Conversion will not affect whether the structured settlement assignment satisfies the requirements of a qualified assignment under § 130(c);" and
- "The annuity purchased by Assignee will not fail to be a qualified funding asset under § 130(d) by reason of the Notice of Hardship Conversion."