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COMP OPTION MADE EASIER

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WASHINGTON-Self-insured and insured employers both will be able to benefit from a change in federal tax law that encourages use of structured settlements to resolve workers' job-related accident and illness claims.

However, state workers compensation administrators and labor spokesmen expressed a few concerns about the effect of the change on state-based workers compensation systems.

The new provision, included in the federal tax bill President Clinton signed earlier this month, amends the Internal Revenue Code to make it more tax-favorable for an employer to use structured settlements to resolve workers comp claims filed after Aug. 5 this year.

The provision, which began as a separate bill introduced in May, will allow employers-or their insurers-to assign a structured settlement to a financial institution rather than maintaining ownership of it on behalf of the worker as they often did under the old tax law.

Under a structured settlement, the employer purchases an annuity to cover what has been determined to be the amount owed the worker, and the worker receives a stream of tax-free periodic payments rather than one lump sum.

In purchasing the annuity, the employer can depend upon the interest that will be earned on the principal to meet the required amount of the settlement. That allows the employer to pay a lesser amount up front, taking advantage of what is called the time value of money to pay the claim.

"It's really difficult to quantify the exact dollar savings implicit in any structured settlement transaction from an employer's point of view," said Andrew Larsen, executive vp with First Colony Life Insurance Co. in Lynchburg, Va.

"However, most employers will benefit from the opportunity to fix their loss costs and transfer the mortality and investment risks associated with long-term disability claims," Mr. Larsen said.

Life insurers that sell annuities can better manage mortality and investment risks because those insurers have a broad pool of claimants, which allows them to take advantage of the law of large numbers, he added.

Under the new provision, an employer would be able to immediately write off the present value of the entire settlement, rather than recognizing the expense as payments are made to the worker. An employer would pay a separate fee to a financial institution to administer the settlement for the worker (BI, Aug. 4).

The change could benefit workers, too, because the financial institution possibly would be more financially secure than a single employer, according to supporters.

According to Randy Dyer, executive vp of the National Structured Settlements Trade Assn., the question is: "Would an injured worker rather have his annuity held by a secure annuity company or Joe's Trucking Co.?"

In addition, workers receiving periodic payments from structured settlements potentially would come out ahead in terms of taxes because they would have less tax-free money in one lump sum to use for income-generating activities, such as stock purchases in which dividends are taxed.

The little-noticed tax change was pushed primarily by the structured settlements trade group, spokesmen for bill sponsors said.

The association estimates that expanding the use of structured settlements in workers compensation could annually add $6 billion to $8 billion in new business to the structured settlement industry's $25 billion to $30 billion of existing business, Mr. Dyer said.

But the trade group is not the only beneficiary of the tax law change.

"For most employers of for-profit companies, structured settlements (of workers comp claims) are advantageous because it eliminates the administration of payouts that could last for years," said Billie Fae Fuschi, assistant director of workers comp for Memphis, Tenn.-based Methodist Health Systems Inc., which operates health care facilities in Tennessee and Mississippi.

Such settlements also eliminate most employers' need to periodically check the continued eligibility of claimants, such as widows or students who may lose benefits if their status changes.

However, her own not-for-profit organization actually uses structured settlements infrequently, in part on philosophical grounds and partly due to its competent in-house administration program that is familiar with handling periodic payments, she said.

Currently, the overwhelming majority of workers comp cases are settled after a worker reaches maximum medical improvement and includes compensation for all medical care, several sources said. "Some kind of structured settlements are probably used in every state," said Michael LeFever, president of the International Assn. of Industrial Accident Boards & Commissions. He is also executive director of the Workers Compensation Commission in South Carolina.

Each state has its own rules about the use of structured settlements; however, no national data is available about the use of structured settlements in workers compensation cases.

Structured settlements are especially used to resolve claims categorized as "doubtful and disputed," on which neither side wants a full hearing, Mr. LeFever said.

"This was a squeaky clean issue," said Scott Spear, chief of staff for Rep. Clay Shaw, R-Fla. Rep. Shaw was one of the bill's chief sponsors. There was no opposition from the U.S. Treasury Department or anyone else, Mr. Spear said.

In fact, few employer or insurer groups apparently knew about or focused on the measure. However, representatives say they are generally supportive of the tax law change.

"Normally, employers have been supporters of periodic payments rather than lump-sum payments," for all types of court awards, including tort and medical liability cases, said Anne Allen, state legislative counsel for the Risk & Insurance Management Society Inc. in New York.

Workers have favored lump-sum settlements, though employers have been wary of them because at least one study found that 90% of lump-sum recipients had dissipated the money within five years, said Ms. Allen.

The National Assn. of Independent Insurers in Des Plaines, Ill., "mildly supported" the provision, said Nancy Schroeder, the organization's director of workers compensation. However, state administrators and labor spokesmen raised a few concerns.

The fear that a worker would dissipate a lump-sum award "is sort of a paternalistic argument that is disappearing" as a concern among administrators, said the IAIABC's Mr. LeFever. For example, adjudicators in his state of South Carolina generally support letting injured workers control their own destinies and will award benefits in lump sums.

"For some individuals who want to restructure their futures with lump sums, a structured settlement prevents them from making the up-front investment in changing their lives," said Melody Cathey, director of education and research for the IAIABC.

"As far as labor is concerned, we are not opposed to (the tax change). We just don't want to see this being used in any way to encourage any more settlements than are already the case today," according to Jim Ellenberger, assistant director for the AFL-CIO's department of occupational safety and health in Washington.

Overall, though, the tax law change will not "materially affect the manner and speed" in which workers comp claims are settled, Mr. LeFever estimated. That is primarily because tax incentives appeal primarily to "the bean counters" and not the claims handlers and lawyers who are directly involved in resolving workers comp cases.

Mr. Dyer of the structured settlement association said he plans to launch a campaign to educate the workers comp community about the tax law change.