What are Qualified and Non-qualified Structured Settlements?

Structured Settlement is a unique form of settlement between two parties – the claimant who files a lawsuit against the other party, the defendant, for an injury claim or the workers compensation etc. It has also become a popular settlement option in the insurance sector where the insured can claim the insurance money, in a structured way of receiving it in installments rather than as a lump sum amount. These installments can be variable depending on the agreement between the two parties like – a smaller annual amount for next 20 years or a larger amount per year for next 10 years etc. The amount for initial few years could vary from the installment amount for years thereafter to the extent that the claimant can also choose to have no payments for few initial years and fixed annual installments thereafter.

Now, qualified structured settlements are those that qualify for preferential tax treatment of having no tax liability at all. These apply for the cases of personal injury loss such as worker’s compensation or injury in an accident etc. On the other hand are the non-qualified structured settlements which apply for the cases that do not qualify under the former category. These are for cases of non-personal injury loss such as Race Discrimination, divorce, sexual harassment of non-physical origin of claim etc.

Both have certain similarities and dissimilarities, each of which is discussed briefly below:

Similarities of Qualified and Non-qualified Structured Settlement

There are certain explicit and obvious similarities between the qualified and non-qualified structured settlements. They are as follows:

  • Guaranteed income stream to the Claimant – The claimant gets the right to receive ensured and regular payments according to the Periodic Payment Settlement Act of 1982 under both these settlement categories. All such agreements have legal backing and the consent of the court.
  • Avoids windfall losses to the claimant – The claimant may end up splurging if he gets a large lump-sum amount. This risk can be avoided through qualified or non-qualified structured settlement, depending on the nature of the case, wherein payment in annual installments and not altogether at once avoids any risk of windfall losses which may occur in case of the claimant making bad financial decisions.
  • Flexibility in deciding the terms of payments schedule – The qualified as well as non-qualified structured settlements are agreed upon by planning and negotiation and the claimant can involve himself along with his attorney into the drafting of such an agreement to suit his financial requirements.QUALIFIED AND NON-QUALIFIED STRUCTURED SETTLEMENTS
  • Defendant can release himself from future payments obligation – The qualified or the non-qualified structured settlement can help the defendant to free himself of payments obligation all at once by handing over the responsibility of paying the claimant regularly to a life insurance company. He can pay a huge lump sum to that company which then takes over the role of making payments by handing over an annuity to the claimant. This way the defendant can be relieved of the responsibility.
  • No Compensation after claimant’s death – The Law guarantees that if the original defendant party dies, the income to the claimant will not be hampered. It will continue like any other normal payments from the agreement. But, in case of the claimant, if the claimant dies suddenly before the completion of receipt of all due periodic payments, then there are no further payments henceforth. Thus it is usually suggested that the claimant must agree upon a shorter period of time rather than for longer duration.
  • Security of payments – Only highly rated insurance companies back the periodic payments settlements so structured settlements have very low risk of default. This makes these structured settlements safe.
  • Completely inflexible once the terms have been decided – The qualified as well as non-qualified structured settlements offer flexibility of payments schedule while drafting of the agreement . But after the terms have been decided and formally approved by the court, they cannot be changed in any case. This makes the structured settlements highly inflexible after the official authentication if the payments schedule by the court.
  • The claimant is not the owner! – The claimant does not own anything except the claim to the payment under both, qualified or the non-qualified structured settlements. In fact the claimant cannot be the owner of the policy otherwise the tax-free arrangement would not be applicable. Going by the actual process, the defendant passes on the money and right to make payments to an insurance company who in turn, pays the money periodically to the claimant. Thus, the insurance company holds the right of ownership of the settlement policy, not the claimant.

Differences Between Qualified and Non-qualified Structured Settlements

Like two sides of the same coin, there are certain demerits against the various merits for the claimant by using the mode of receipt of payments through structured settlements which are listed below:

  • Preferential Tax Treatment – The Internal Revenue Service Code Section 104(a) (2) states that all the settlement payments received by the claimant under the cases that come under qualified structured settlements law. Even the interest on this amount is tax-free. While the non-qualified structured settlements do not qualify under section 130(c) of the Internal Revenue Code that sets specific conditions to be met in order for the liability assignment to retain its “qualified” or tax exempt status.
  • Types of injury claims – The Periodic Payment Settlement Act of 1982, ensures that the claimant receives a guaranteed income stream by the consent of the court of law with adequate legal backing in case of personal injury claims such as an accident or case of medical negligence under qualified structured settlements. But, in case of non-qualified structured settlements the cases must come under the category of a non-personal injury claim such as age or racial discrimination, breach of contract, divorce, business sales etc.
  • Varying Tax liability – As discussed earlier, qualified structured settlements have no tax liability while the non-qualified structured settlements involve tax liabilities. But, these taxes are not paid on the whole of the amount to be received. Taxes are accrued only on the part of the amount received in a particular year. Moreover, they claimants can save themselves from this liability by paying the tax on entire lump sum immediately if they want to get rid of the risk of fluctuations on interest rates in future.
  • Different Settlement Agreements by different drafting companies – The structured settlement agreement could differ according to different companies who are drafting the qualified or the non-qualified settlement agreement on behalf of the defendant party. Thus, if that turns out to be a company with some regulations regarding drafting of such an agreement for claims settlement, the claimant might end up with a different agreement as compared to other claimants with the same case against the defendant party. Moreover, even the nature of the case like whether it comes under qualifies for preferential tax treatment or not, may make a difference in the company’s policies.

In the end ..

As you can see there are both similarities and differences between qualified and non-qualified structured settlements. Based on the situation one if them is applicable.