Beyond Structured Settlements

NSSTA Membership Qualifications

Is the National Structured Settlement Trade Association (NSSTA) guilty of hypocrisy when it prohibits its members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements?"

NSSTA repeated its prohibition this week in a letter to members which NSSTA first distributed in 2006. NSSTA justifies its prohibition because NSSTA's Board of Directors consider structured settlement factoring transactions incompatible with NSSTA's mission. The primary mission of NSSTA, which appears in the NSSTA bylaws but not on the NSSTA website, is "to promote the establishment and preservation of structured settlements in order to provide long-term financial security to personal injury claimants and their families through periodic payment of compensation."

How could NSSTA's prohibition against promoting structured settlement factoring transactions be considered hypocrisy?

NSSTA's letter to its members identifies some of the types of factoring-related activities its Board of Directors has identified as incompatible with its mission. Conspicuous by their absence are: 1) purchasing structured settlement payment rights; 2) lobbying to enact structured settlement factoring legislation; and 3) amending model industry documents to facilitate factoring transactions.

It is common knowledge within the industry that multiple structured settlement annuity providers (NSSTA members), or their affiliates, are active purchasers of structured settlement payment rights after those payment rights have been securitized by structured settlement factoring companies. NSSTA, however, has made no apparent attempt to investigate and/or punish members who promote structured settlement factoring as purchasers thereby helping to generate demand.

NSSTA itself helped to legitimize and promote the growth of the structured settlement secondary market when it collaborated with the National Association of Settlement Purchasers (NASP) to draft and lobby in favor of IRC section 5891 and the Model State Structured Settlement Protection Act. Coincidentally, both the primary structured settlement market and the secondary structured settlement factoring market experienced rapid growth following the 2001 enactment of these enabling laws.

NSSTA further supported and facilitated structured settlement factoring transactions following the enactment of IRC section 5891 when it amended its Model Qualified Assignment and Release form. Paragraph 7 of NSSTA's model form, which represents an important industry standard for structured settlement documentation, now reads in relevant part:

"Acceleration, Transfer of Payment Rights. None of the Periodic Payments and no rights to or interest in any of the Periodic Payments ... can be ....
ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly unless such sale, assignment, pledge, hypothication or other transfer or encumbrance .... has been approved in advance in a "Qualified Order" as defined in Section 5891(b)(2) of the Code (a "Qualified Order") and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute."

Having recognized and facilitated an historic change in structured settlement law, that NSSTA itself helped to enact, by amending a key section of NSSTA's core model settlement document, NSSTA's Board of Directors consciously and strategically failed to take one more critical step. They failed to reconcile NSSTA's mission with a legislative change that fundamentally redefined the structured settlement business.

As a consequence of continuing to promote a mission no longer in sync with existing laws, NSSTA has trapped itself and its members in a strategic dilemma of its own creation. NSSTA should be encouraging its members to utilize the new laws to improve their products and grow their market. Instead, NSSTA selectively proscribes legal activities and restricts innovation that cross an artificial behavioral line of NSSTA's own design. And for what strategic purpose?

So, as primary structured settlement sales plummet and secondary market structured settlement sales soar, is the attitude of NSSTA's Board of Directors toward structured settlement factoring stubbornly hypocritical or strategically challenged or both?

Treasury Publishes New IRC 104(a)(2) Regs

The United States Treasury has published new regulations for IRC section 104(a)(2) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness.

Published January 20, 2012, the new section 104(a)(2) regulations make two primary changes to the current regulations. First, they incorporate amendments to 104(a)(2) made in Small Business Job Protection Act of 1996 (1996 Act). Second, they eliminate the previous regulatory requirement that damages must be based upon “tort or tort type rights” to qualify for the tax exclusion.

The 1996 Act included two legislative amendments narrowing the applicability of the 104(a)(2) exclusion. The first amendment prevents any punitive damages from qualifying for the tax exclusion in the personal injury context. The second amendment requires that injury or sickness damages must result from “physical” origins to be excluded. Although emotional distress is not considered a physical injury or physical illness, the new regulations confirm that damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2).

The new section 104(a)(2) regulations also eliminate the previous regulatory requirement that damages must be “based on tort or tort type rights” to qualify for exclusion. In a 1995 case (Commissioner v. Schleier), the United States Supreme Court interpreted this requirement to disallow the exclusion of damages where the relevant law (a "no-fault" statute) provided a contractual remedy even though the claimant suffered a personal physical injury or physical sickness as a result of a breach of contract. The new regulations eliminate this prior requirement and allow the tax exclusion to apply even when the physical injury or sickness does not constitute a tort under state or common law.

The new, final regulations for section 104(a)(2) are essentially the same as the proposed regulations the United States Treasury issued in 2009 and which were the subject of a public hearing on February 23, 2010. The final regulations did not adopt any of the recommendations offered by commentators at the public hearing. These recommendations included:

•  Requests by Richard Risk and Jack Meligan that the final regulations address whether a claimant has constructive receipt or the current economic benefit of a damage award that is set aside for the claimant’s benefit in a section 468B qualified settlement fund;

• Requests by John McCulloch and David Higgins that the final regulations confirm several specific types of damages are "physical" and therefore tax-exempt.

For background information about the new section 104(a)(2) regulations and their application to structured settlements, including commentary and analysis by Jeremy Babener, see these prior S2KM blog posts:

• Treasury Hearing on IRC 104(a)(2) Regs
• A Common Cause at the Treasury Regulation Hearing
• Treasury Hearing Commentary
• Voices at the Treasury Hearing
• Speaker Comments at the Treasury Hearing
• Legislation to Expand the Structured Settlement Industry
• Babener Proposes Expanded S2 Tax Subsidy

For a copy of the new section 104(a)(2) regulations, see the structured settlement wiki.