Definitions

Congress adopted special tax rules in Public Law 97-473, the Periodic Payment Settlement Tax Act of 1982 to encourage the use of structured settlements to provide long-term financial security to seriously injured victims and their families. These structured settlement rules, as codified in sections 104(a)(2) and 130 of the Internal Revenue Code of 1986, 26 U.S.C. 104(a)(2) and 130, have been in place working effectively since then. In the Taxpayer Relief Act of 1997, Congress extended the structured settlements to worker’s compensation to cover physical injuries suffered in the workplace. A “structured settlement” under the tax code's terms is an "arrangement" that meets the following requirements:

The structured settlement tax rules enacted by Congress lay down a bright line path for a structured settlement. Once the plaintiff and defense have settled the tort claim in exchange for periodic payments to be made by the defendant, the full amount of the periodic payments constitutes tax-free damages to the victim. The defendant then may assign its periodic payment obligation to a structured settlement assignment company (typically a single purpose affiliate of a life insurer) that funds its assumed obligation with an annuity purchased from its affiliated life insurer. The rules also permit the assignee to fund its periodic payment obligation under the structured settlement via U.S. Treasury obligations. However, this U.S. Treasury obligation approach is used much less frequently because of lower returns and the relative inflexibility of payment schedules available under Treasury obligations. In this way, the defense can close its books on the liability, and the claimant can receive the long-term financial security of an annuity issued by a financially strong life insurance company.

To qualify for special tax treatment, a structured settlement must meet the following requirements:

A structured settlement must be established by: A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2) (26 U.S.C. § 104(a)(2) ); or An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1) (26 U.S.C. § 104(a)(1)

The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) (26 U.S.C. § 130(c)(2)) ) and must be payable by a person who: Is a party to the suit or agreement or to a workers' compensation claim; or By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130 (26 U.S.C. § 130 ).