SPECIFICALLY SPEAKING | PROFESSIONAL LIABILITY
The Closer
using Structured Settlement Benefits to Close Employment Claims
By Teddy Snyder and Kenneth West
The settlement of an employment claim often creates adverse tax consequences for the plaintiff in the year of
the settlement payment. Often, those
tax consequences are not discussed or
even given any consideration in negotiations or at mediations until the eleventh hour when the parties achieve a
monetary settlement and raise the
issue of tax treatment for the first time.
Occasionally, it can become an impediment in achieving a final resolution.
Structured settlements can help in
these situations by stretching out the
settlement payment over the course
of several years. The goal of the structured settlement in the typical employment case is to defer tax until the year
the money is actually received, not
the year of the settlement. Payments
can be made to the plaintiff for a predetermined time or even over the
plaintiff’s entire remaining life.
When a structured settlement is used,
it must be memorialized in the settlement agreement. The use of specific
language is essential to ensuring compliance with the tax doctrine of constructive receipt. The release language
must specify the future payments.
The defendant or insurer reserves the
right to fund the future payments with
an annuity from a named company.
In almost all cases, the defendant or
insurer reserves the right to assign
the responsibility for those payments
to an assignee who holds title to the
annuity contract.
When Should a Structured
Settlement Be Considered?
The tax consequences of an employment claim can sometimes turn what
looks like an attractive settlement offer
into a negative number for the plaintiff. Settlement proceeds in employment cases are generally taxable and
may create FICA and FUTA obligations for the defendant. Only compensation for physical injuries is tax-free
under Internal Revenue Code sec. 104.
A plaintiff who receives a taxable settlement all at once will likely find a
large portion of it lost to federal and
state taxation. In addition, the plaintiff’s other income, which would have
been taxed at the plaintiff’s usual rate,
will now be taxed at the new higher
rate. A large payment in a single year
