Structured settlements are a great tax deferral solution for employment related settlements, such as emotional distress, discrimination, sexual harassment, wrongful termination, failure to promote, lost pension differential and many other employment related claims. A 2008 IRS Private Letter Ruling (PLR 200836019) supports the use of structured settlements to resolve employment claims.
A former employee entered into a employment structured settlement
with her employer relating to mental anguish and emotional distress from a claimed hostile work environment. The IRS held that the economic benefit and constrictive receipt doctrines would not apply to cause the employee to report income prior to her actual receipt of cash. The Settlement Agreement and Release which the employer and employee entered into required up front cash paid in a lump sum, and periodic payments for the other claims. The agreement precluded the employee from accelerating, deferring or otherwise changing the periodic payments. The employee cannot elect to receive the commuted value of the periodic payments. The employer could enter into a non-qualified assignment with a company that will make the payments. No assets were set aside to secure these payments. The employee is not deemed to have received any property when the employer pays the assignment company funds. Because of the restrictions on the employee she cannot be deemed to constructively receive the funds, there is no current taxation.
Why Would a Plaintiff Structure an Employment Settlement?
Consider that an employment settlement is a taxable settlement. Therefore that big recovery could be ALOT smaller in year one after applying Federal and State income taxes. By structuring your employment related settlement, more of the money is working for the plaintiff right away. Properly structured, taxes are paid by plaintiffs in the year payments are received.
- Employment structured settlements offer the Claimant/Plaintiff stable secure income and peace of mind
- Cash flow can be structured exactly the way the employee wants it
- Employer can make Plaintiff whole without the typical gross up for taxes. For example $X is the PV of the lost pension paying $Y per year for life, beginning at age 65. If paid in a lump sum more needs to be paid now to make the plaintiff whole because of the income taxes that would be due on the lump sum leaving less to invest to produce income. Said another way, If the pension loss is $Y per year beginning in 10 years, we can calculate that cost and it will cost the Employer or Insurer a meaningful amount less than the present value $X grossed up to account for the taxes
- Employee may be able to mitigate Alternative Minimum Tax (AMT), where applicable, by spreading settlement payments over time
Ways of structuring employment settlements
- Non qualified assignments using structured settlement annuities to fund the obligation
- Non qualified assignment using Treasury Funded Structured Settlements
- Periodic Payment Reinsurance, when the paying party for the employment settlement is an insurer; and, for those with a greater level of risk tolerance
- Non-qualified assignment using alternative non-qualified assignment entities not associated with insurers based in Barbados or Republic of Ireland or Barbados
- Funding Agreement issued by insurance company that is owned by the Defendant or Defendant’s insurer. In such cases there is no assignment and the Defendant or Insurer remain contingently liable.
What's the Best Size Case For an Employment Structured Settlement?
Employment structured settlements are appropriate on cases of all sizes. We have concluded them on employment cases ranging from a modest settlement to multi million dollar employment structured settlements.
4structures® can assist parties in employment litigation to help bridge gaps, to "do the math", to educate parties on either side to better understand how this valuable employment settlement financial tool works, the financial security of the transaction and the required documentation.
- Certain components of employment settlements cannot currently be structured (i.e. back pay and front pay).
- Employment structured settlements must be created as part of the consideration for the settlement. They cannot be created after actual or constructive receipt has occurred