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WASHINGTON -- A House bill would create new tax penalties for companies that buy a portion of structured settlements awarded to accident victims.
The targeted transactions involve specialty finance companies that make discounted cash payments to settlement recipients in exchange for receiving a portion of the periodic payments under an annuity.
The legislation was sparked by "dramatic growth" in these transactions, in which injured parties who have won damages -- including workers hurt on the job -- are induced "to sell off future structured settlement payments intended to cover ongoing living and medical needs in exchange for a sharply discounted lump sum that then may be dissipated, placing the injured victim in the very predicament the structured settlement was intended to avoid," said Rep. E. Clay Shaw Jr., R-Fla.
Rep. Shaw late last month co-sponsored the bill, H.R. 4314, with Rep. Pete Stark, D-Calif., and 15 other House members signed on to it. The measure has been referred to the Ways and Means Committee, and sponsors hope it will become part of a larger tax bill considered in September.
The "Structured Settlement Protection Act" would amend the Internal Revenue Code to create a new excise tax to be paid by the so-called factoring companies that purchase such settlements.
The bill calls for a 50% excise tax on the difference between the total value of the annuity payments and the discounted lump sum the factoring company pays for them. An exclusion would be allowed only in hardship cases authorized by a court order.
Lawmakers have "grave concerns that these factoring transactions directly undermine the policy of the structured settlement tax rules," Rep. Shaw said when introducing the bill.
The bipartisan bill would supersede a Treasury Department request this spring for a 20% excise tax on the transactions.
"Swift passage of this bill is vital to the continued protection of seriously injured persons from the usurious discount rates and high-pressure sales tactics common in this 'gray market' industry," said Randy Dyer, executive vp of the Washington-based National Structured Settlement Trade Assn.
For employers and insurers, however, "the big fear" is that if Congress begins to view settlement resales as just another marketplace practice, it could jeopardize the current tax-free status of structured settlements, a tax policy that benefits both injured persons and insurers, Mr. Dyer said.
Current law lets the injured person receive the benefits tax-free, though a recipient cannot accelerate, defer, increase or decrease payments.
Many employers and insurers like using structured settlements because they are far less costly than lump-sum settlements. Structured payments are funded by buying an annuity based on the present value of future periodic payments, factoring in future income from interest.
Structured settlements, which are voluntary arrangements often negotiated prior to a hearing, also can help reduce litigation costs by resolving cases more quickly.
Passage of the bill may create some special concerns for employers, cautioned Lance J. Ewing, chairman of the Risk & Insurance Management Society Inc.'s External Affairs Team and loss control administrator for the Philadelphia Public School System.
"I believe that plaintiffs' attorneys and factoring companies may join forces so the plaintiffs' attorneys will ask for larger settlements to offset the new excise tax," he said. As a result, "employers may be less willing to go the structured settlement route and may want to push for lump-sum settlements, although they may not be in the best interests of the claimant," Mr. Ewing said.
In addition, claimants whose settlements provide that all additional related medical care will be paid separately might be encouraged to try to attribute any medical malady to the original injury, he said.
From a claimant's perspective, though, settlement resales provide greater flexibility and discounted lump-sum cash, said Michael Goodman, executive vp and chief operating officer of Philadelphia-based J.G. Wentworth & Co. Inc., a factoring company. "When life changes, everyone should have the right to determine what's best for his life," especially to accept a new business opportunity, or meet medical, housing or tuition requirements, he said.
Since 1995, the company has completed 12,000 structured settlement resales, with a present value of about $250 million.
The company, an affiliate of Dutch financial conglomerate ING Barings Group, bundles these settlement resale agreements and periodically resells them in the financial market.
In a typical resale arrangement, an injured person agrees to sell to Wentworth his or her rights to a portion of a structured settlement for a lump sum that is discounted at about 19%, though the rate changes monthly, Mr. Goodman said. He denied critics' allegations that discounts can be as high as 60%, especially in cases where a claimant repeatedly sells portions of a settlement.
After a sale, checks for the periodic payments are routed first to Wentworth, so the company can take its agreed-upon cut before it passes the remainder on to the injured person, a practice critics say skirts anti-assignment clauses in annuity contracts.
An injured person also signs a "confession of judgment," which is designed to allow Wentworth to seek court approval to garnish the injured person's income if the person seeks to "commit fraud" by failing to live up to the terms of the resale agreement, as 2% to 3% of claimants attempt, Mr. Goodman said. Such fraud may include attempts to reassert full ownership of the payments with the annuity company.
However, a typical resale arrangement also can contain other controversial legal practices, factoring companies' critics say.
For example, a state court judge in Louisville, Ky., on June 20 denied Wentworth's motion to garnish the incomes of four injured persons who had previously entered into settlement resales with Wentworth. The judge's assessment of their settlement resale arrangements was, "Wentworth has attempted to accomplish by sleight of hand what it is prohibited from doing directly."
Wentworth is reviewing the decision and considering an appeal, Mr. Goodman said. Nationally, though, "very little case law exists about the propriety of settlement resales," he said.
Congress is not the only forum for legislation to curb factoring companies; states also have considered related action. During the past year, Connecticut, Illinois and Kentucky have enacted laws designed to curb settlement resales, according to the structured settlement trade group.
Illinois law requires court approval for companies holding the settlement annuity from making payments to anyone other than the designated recipient.