Beyond Structured Settlements

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.

MSA Update - 3B: Structured Settlement Annuities

Introduction (added September 9, 2008): The CMS rules for structured settlements and MSAs are dynamic and subject to change and conflicting interpretations. Since S2KM published this post, S2KM and Thomas Spratt became aware of an additional and more recent CMS policy memorandum dated August 20, 2008. Please see S2KM's subsequent blog post titled "MSA Update - 3C" for more current information about the CMS rules for life expectancy and rated ages.  This new CMS policy memo makes Tom's comments below about past CMS changes and inconsistencies with age ratings all the more relevant and valuable.

A prior S2KM blog post (MSA Update - 3A: Structured Settlement Annuities) introduced Thomas Spratt as a Medicare set-aside (MSA) expert. This post continues that conversation and looks more closely at MSA cases involving structured settlement annuities. S2KM's interview with Thomas Spratt is part of two related S2KM series:

• Growing the Structured Settlement Market
• Medicare Set-Aside Update

S2KM is also capturing and featuring the "Growing the Market" series in S2KM's Structured Settlement Wiki.

S2KM: S2KM's earlier blog post (Medicare Set-Aside Update - 2) summarizes current CMS rules for structured settlements and MSAs. What about these existing CMS structured settlement rules strikes you as most significant?

TOM SPRATT: Two requirements jump out at me as significant. First, although CMS requires two years of seed money, the annuity must begin funding within one year. Despite this CMS "over-funding" requirement, annuities still may cost less than lump sum alternatives because of the set-off method CMS uses to calculate present value. Second, the CMS payout rules for structured settlements favor temporary life annuities - the shorter of actual life and a fixed term estimating life expectancy. Beginning July 1, 2008, CMS calculates life expectancies based upon a life table for the total population (Table 1) developed by the Centers for Disease Control (CDC). If an MSA beneficiary lives beyond the projected life expectancy, a potential shortfall could arise that would unfairly burden either Medicare or the MSA beneficiary.

S2KM: Is CMS enforcing its MSA structured settlement rules consistently?

TOM SPRATT: In my experience, yes. Prior to July 1, 2008, there was some confusion and inconsistency with rated ages supplied by annuity providers which CMS utilized to determine life expectancy. CMS initially used the "mean" when several rated ages were submitted, then changed to the "median". CMS also rejected rated ages for determining life expectancies from annuity providers affiliated with casualty insurers without restricting the purchase of an annuity from these companies. In its May 20, 2008 policy memorandum, however, CMS announced it would only accept life expectancies obtained from CDC Table 1. S2KM note: the May 20, 2008 policy memorandum is available for download on this CMS website.

S2KM: Besides structured settlement annuities, what are the most common MSA funding products?

TOM SPRATT: CMS does not mandate any specific type of MSA funding mechanism. Even with annuities, however, CMS does require MSA assets to be retained in an interest-bearing account.

S2KM: Under the current CMS MSA rules, what are the advantages and disadvantages of structured settlements?

TOM SPRATT: Despite having to "over-fund" MSAs with two years of seed money when annuities are utilized, annuities still result in a lower settlement cost in many cases. In addition, the great majority of MSAs are self-administered. The CMS administrative requirements for MSAs are the same for self-administrators and professional administrators. Annuities help prevent premature dissipation of MSAs - especially self-administered MSAs. If an MSA is dissipated prematurely, a beneficiary risks losing Medicare payments. If premature MSA dissipation occurs, workers compensation settlements might be further reduced. Not all states permit workers compensation settlements. Some states preclude the settlement of future medical expenses.

S2KM: In the context of "growing the structured settlement industry", what should the structured settlement industry be doing to improve MSAs?

TOM SPRATT: The most significant issue for the MSA industry, including structured settlements, is the problem of "changing numbers". To reduce delays in its MSA approval process, CMS has encouraged workers compensation insurers and self-insurers to obtain state approval for a settlement before submitting the case to CMS for its approval. Unfortunately CMS often changes the numbers including the seed money, the annuity start date, annual payouts, life expectancy, etc. Of course, this creates havoc for annuity providers and consultants. CMS needs to address this problem of changing numbers.

S2KM: Tom, thank you for the informative interview.

This concludes S2KM's interview with Thomas Spratt about Medicare set-aside arrangements and structured settlements.

MSA Update - 3A: Structured Settlement Annuities

This S2KM blog post begins an Interview with Thomas Spratt about structured settlement annuities and Medicare set-aside arrangements (MSA). This S2KM interview continues two related S2KM series:

• Growing the Structured Settlement Market; and
• Medicare Set-Aside Update.

Thomas Spratt is Senior Vice President of Technical Operations at Protocols. Based in Denver, Colorado, Protocols is a leading MSA specialty company. Tom lives in Manchester, N.H. Prior to joining Protocols, Tom worked as a Manager for Liberty Mutual Insurance Company where he developed and managed Liberty's MSA compliance program. Tom is a national and state-specific jurisdiction expert on employers' liability and workers' compensation. Tom is a member of NSSTA and NAMSAP.

S2KM: Greetings, Tom. Thank you for participating in this S2KM interview.

TOM SPRATT: Thank you. I am glad to have the opportunity to discuss these important issues.

S2KM: What were your MSA responsibilities with Liberty Mutual Insurance Company?

TOM SPRATT: As Manager of Liberty's Home Office Workers' Compensation Department, I was responsible for ensuring Liberty Mutual compliance with the Medicare Secondary Payer (MSP) regulations.

S2KM: In how many MSA cases have you participated? How many of these MSAs were funded with structured settlement annuities?

TOM SPRATT: At Liberty, I was personally involved with hundreds of MSAs over nine years. The first MSA I personally engineered occurred in 1999, well before CMS published their first policy memorandum in July 2001. As for structured settlements, virtually all MSAs in the Liberty program utilized annuities based upon funding criteria I established as Manager. Whenever the MSA funding was $20,000 or more, exclusive of the seed money CMS requires, Liberty utilized a structured settlement annuity.

S2KM: What are your responsibilities at Protocols? Who are your clients and what professional services do you personally provide?

TOM SPRATT: At Protocols, my duties are comprised of assisting clients with establishing, documenting and maintaining Medicare compliance programs. These compliance programs include training for claim and legal staffs as well as involvement in specific cases. Protocols offers a complimentary workshop which covers key Medicare developments since Medicare's inception including MSAs. In addition to Medicare, I also provide workshops about catastrophic claim management which has been my broader specialty for over 30 years. Protocols clients are mainly insurance carriers, self-insured employers and TPA’s.

S2KM: The Centers for Medicare and Medicaid Services (CMS) has stated it receives, on average, 1550 workers' compensation (WC) MSAs per month. In your best estimate, how many of those submissions, on average, involve structured settlement annuities?

TOM SPRATT: I don’t know the total number of structured settlement annuities. It appears to me there are many fewer annuities used than should be. This result may be caused, in part, by the deluge of “rated age” requests received by annuity providers with a limited overall increase in annuity premium.

S2KM: Who tracks information about MSAs and structured settlement annuities - CMS? NSSTA? NAMSAP? Annuity providers?

TOM SPRATT: I am unaware of anyone who is tracking or reporting the overall number of MSAs funded with structured settlement annuities. CMS has reported that 94% of MSA's submitted to them are “self administered”. This statistic underscores the need for structured settlement annuities to avoid premature exhaustion of the MSA funds.

S2KM: Who are the leading structured settlement annuity providers for MSAs?

TOM SPRATT: Except for Liberty Mutual, I don’t know which structured settlement annuity providers have the greatest MSA market share. Fortunately, several are very active and competitive in the MSA market.

This concludes Part A of S2KM's interview with Thomas Spratt about MSAs and structured settlement annuities.