Structured Settlements Workers' Compensation Structured Settlements 1 — Questions and Answers
Question 1: Under which IRC section are workers' compensation periodic payments excluded from federal income tax?
- IRC §104(a)(2)
- IRC §104(a)(1) (Correct answer)
- IRC §130
- IRC §72(e)
Correct answer: IRC §104(a)(1)
Workers' compensation payments, including structured periodic payments, are excluded from gross income under IRC §104(a)(1), which specifically covers workers' compensation acts.
Question 2: What is a 'Section 32 waiver' in the context of federal workers' compensation?
- An IRS waiver allowing taxable workers' comp payments
- A settlement of a federal workers' compensation claim under the LHWCA or FECA, approved by the Department of Labor (Correct answer)
- A waiver of the court approval requirement for structured settlements
- A Medicare waiver allowing workers to keep settlement funds
Correct answer: A settlement of a federal workers' compensation claim under the LHWCA or FECA, approved by the Department of Labor
Under the Longshore and Harbor Workers' Compensation Act (LHWCA), Section 32 allows parties to settle claims with Department of Labor approval, often resulting in a structured settlement.
Question 3: What is a 'workers' compensation Medicare Set-Aside' (WCMSA)?
- A retirement account funded by workers' compensation benefits
- A portion of a workers' compensation settlement set aside to pay for future Medicare-covered medical expenses related to the work injury (Correct answer)
- A mandatory insurance policy for employers
- A state fund that pays workers' comp claims when an employer is uninsured
Correct answer: A portion of a workers' compensation settlement set aside to pay for future Medicare-covered medical expenses related to the work injury
A WCMSA allocates part of the WC settlement to cover future medical costs that Medicare would otherwise pay, protecting Medicare's secondary payer interests.
Question 4: Which federal agency reviews Workers' Compensation Medicare Set-Aside proposals?
- IRS
- Social Security Administration (SSA)
- Centers for Medicare & Medicaid Services (CMS) (Correct answer)
- Department of Labor (DOL)
Correct answer: Centers for Medicare & Medicaid Services (CMS)
CMS reviews WCMSA proposals when they meet certain review thresholds to ensure that the set-aside adequately protects Medicare's interests before approving the settlement.
Question 5: What is the primary difference between a workers' compensation structured settlement and a tort (liability) structured settlement?
- Workers' comp settlements are taxable; tort settlements are tax-free
- Workers' comp settlements are governed by state WC statutes and often require administrative approval, while tort settlements are governed by civil law and may require court approval (Correct answer)
- Tort settlements cannot include medical payments; WC settlements can
- Workers' comp annuities cannot include COLA provisions
Correct answer: Workers' comp settlements are governed by state WC statutes and often require administrative approval, while tort settlements are governed by civil law and may require court approval
Workers' compensation structured settlements must comply with state WC statutes and typically require approval from a WC judge or board, whereas tort structured settlements are governed by civil procedure and contract law.
Question 6: Can a workers' compensation structured settlement include a Medicare Set-Aside that is itself structured as periodic payments?
- No — MSAs must always be fully funded upfront in a lump sum
- Yes — a WCMSA can be funded as an annuity providing periodic payments into the set-aside account (Correct answer)
- Only if approved by the IRS
- Only if the claimant is already on Medicare
Correct answer: Yes — a WCMSA can be funded as an annuity providing periodic payments into the set-aside account
CMS allows WCMSAs to be funded by an annuity that makes periodic deposits into the set-aside account, reducing the upfront cost while still protecting Medicare's interests.
Structured Settlements Workers' Compensation Structured Settlements 1
Under which IRC section are workers' compensation periodic payments excluded from federal income tax?