What is the difference between a “qualified” structured settlement and a “non-qualified” structured settlement?
When describing a structured settlement, the terms “qualified” and “non-qualified” generally refer to “assignments” and IRC Section 130. The primary tax difference, from a structured settlement recipient’s perspective, is that “qualified” structured settlement periodic payments are excluded from income tax whereas “non-qualified” structured settlement periodic payments are deferred until actually received.
The term “qualified assignment” is defined for tax purposes by IRC Section 130. “Qualified assignment” means that a defendant or its liability insurer first gives the claimant a promise to pay structured settlement periodic payments in the future; next transfers that obligation to a substituted obligor pursuant to IRC Section 130; and thereby extinguishes its contractual liability for the obligation it transferred.
IRC Section 130 provides that any amount received by an assignee for assuming a periodic payment obligation may be excluded from the assignee’s gross income so long as seven requirements are satisfied:
- The tort claim involves personal physical injury or physical sickness;
- The periodic payments are excludable by the recipient under IRC Section 104(a)(2);
- The assignor is a party to the suit or agreement which gives rise to the obligation;
- The periodic payments are fixed and determinable as to amount and time of payment;
- The periodic payments cannot be accelerated, deferred, increased or decreased by the recipient of the payments;
- The assignee’s periodic payment obligation is no greater than that of the assignor; and
- The assignee purchases qualified funding assets (either annuities or U.S. Government obligations) to fund the periodic payment obligations.
Although IRC Section 130 does establish any restrictions on what types of companies or legal entities may serve as assignees, most qualified assignments are funded with life insurance annuities and the assignees are almost always affiliates of the life insurance companies that issue those annuities. For example, Independent Assignment Company serves as the assignment company for all of Independent Life’s qualified structured settlement assignments.
Qualified Assignments can also be made out of an IRC Section 468B Qualified Settlement Fund (QSF) and can be utilized to fund structured attorney fees for tort cases that involve personal physical injury or physical sickness – whether or not the claimant decides to structure his or her settlement.
Not all settlements involve tort claims, however, and not all tort claims involve “physical personal injury or physical sickness” – which is one of the requirements of IRC Section 130.
A “non-qualified assignment” represents the transfer of a structured settlement periodic payment obligation that does not qualify under Section 130 of the Internal Revenue Code. This means the assignee is subject to applicable taxation on the amount it receives from the defendant or liability insurer that assigns the structured settlement periodic payment obligation when it receives money to purchase the annuity(s) to fund the obligation to the claimant.
“Non-qualified assignments” therefore allow litigating parties the ability to settle a claim and to fund a periodic payment obligation using a “Section 130-like” transfer when neither the claim being settled nor the agreed periodic payments qualify for treatment under IRC 104(a)(1) or Section 104(a)(2). Unlike “qualified” structured settlement cases, however, the income taxation on these “non-qualified” structured settlement periodic payments are deferred rather than excluded.
There are many types of cases that may be resolved through non-qualified structured settlements such as:
- Employment disputes
- Wrongful termination
- Psychological/emotional harassment
- Sexual harassment
- Attorney fees
- Wrongful incarceration
- Punitive damages
An assignee of a non-qualified assignment based in the United States will be subject to corporate income tax on any funds paid to it in exchange for assuming assignee obligations. For this reason, companies offering “non-qualified” assignments typically utilize non-domestic assignment companies.
Independent Life is one of the few structured settlement annuity providers that offers both “qualified” and “non-qualified” structured settlements. For “non-qualified” cases, we leverage the strength and market recognition of two non-domestic assignment companies, Structured Assignments (SAI) of Barbados and Kenmare Assignment Company Limited (Kenmare) of Ireland. By utilizing an offshore assignment company, Independent Life can offer fully customizable payout patterns of fixed and guaranteed payments to settlement planners and their claimants including deferred, lump sum, fixed period or lifetime payments.