The Periodic Payment Settlement Act and the Structured Settlement Protection Act:
The PPSA (Periodic Payment Settlement Act) came into existence in 1982 when President Regan signed it. It has also been a part of the IRS code since then. The purpose of this act is to encourage use of the structured settlements by giving tax exemptions. Long term financial security is offered by structured settlements for the victims of accidents and families of those victims who are rewarded with settlements. The main benefit of this law is that it allows different types of income to not be included in the gross income while reporting on income tax. These types of income include:
- Amount of money which is received for the sickness
- The money which is received for cases of workers compensation
- The money which is received for physical injuries.
The money is excluded whether it is paid over a time period or in the form of a lump sum. It does not matter if money is paid by insurance company or a third party. Immediate effect of the law was creation of a financial tool which was highly beneficial and which offered significant benefits compared to the previous option of lump sum payments.
Changes to Tax Free Status:
The most important of the changes brought by PPSA was granting the tax free status to the structured settlements. However, a clause was added by the government which trips up many of the annuities. The law states that the recipient cannot accelerate, defer, increase or decrease the payments. In case any of such changes occurred, the settlement will lose the tax free status, and injured person will have to pay the tax on the settlement.
It is interesting to know that the insurance companies and third parties agree to take the financial burden and they benefit from it. According to law any money received by assignee from the gross income for an agreement to take on the payments will not be subjected to taxes. Thus, both the assignee/payer and annuitant enjoyed the benefit of income without any tax implications, as long as agreement was enforced in its original form as issued from a judge.
The Structured Settlement Protection Act:
The PPSA which is outlined above was designed in order to make the structured settlements stable financial vehicles. However, there were some problems with it. There was need for another law in order to protect rights of those who received payments via both lottery winnings and court judgments. This was Structured Settlement Protection Act or SSPA. This act was enacted in year 2002.
It is an interesting fact that selling a structured settlement was made more difficult by this law. The main purpose of the enactment of this law was to protect people who received settlements after the catastrophe of 9/11. It was put in place in order to help make sure that the victims and their family members were aware of the actions while selling structured settlements. The law contained a variety of different protections on federal level, such as:
- Professional advice which concerns with the drawbacks and benefits of receiving the lump sum amount should be provided to the individual who was selling a structured settlement.
- Person who is selling structured settlement enjoys the right to cancel this sale within pre-set timeframe. The timeframe is set by each state.
- Full information of fees, expenses or charges of any kind resulting from sale, should be provided to the individual who is selling structured settlement.
- A court of law must approve all the sales of the structured settlements. It is the responsibility of the judge to determine if the conditions of sale are in the best interests of the seller, and in case the judge determines that they are not, he can stop the sale.
- In case the sale is unable to get approval of the court, a 40% federal excise tax is applied to transfer.
Protection for the Payees:
Basic purpose of structured settlement protection act was the protection of the payees. The structured settlements have existed since a long time in different forms. They got quite popular in 1970s. It did not take long for some of the sellers to take advantage of - the lack of understanding with regards to the fees which are associated with sale of their settlements and present value of payments which they will receive in future was exploited. Another major problem was the negation of the financial stability which structured settlements were intended to provide. The reason was that a huge number of sellers did not act responsibly with their lump sum amount after making the sale. The sellers burned through their money quickly, and often had nothing on which they could fall back.
As a result actions were taken on federal as well as state level – 43 out of 50 states have SSPA with their own versions. The version of each state varies considerably from that of other states. Exceptions are there in many states, while there are unique requirements in the some states.
- Alabama has a requirement that payees should have legal and financial disclosure before transfer can happen.
- Alaska has a requirement that the important terms should be disclosed to seller. It is also required that seller must have independent professional advice regarding implications.
- Arizona has the requirement that seller should be advised in writing to seek advice of independent professional.
- In California, it is required that buyer advises the seller of the sellers rights to counsel with regards to the petition. Buyer should also pay fees of counsel up to and amount of $1,500. Transfer agreements copy must be received by the Attorney General’s office in California.
- Colorado has a requirement that seller should be advised in writing to get independent professional advice and factoring for workers compensation is not allowed.
- There is a requirement in Connecticut that seller should be notified by writing to get professional guidance by a third party.
- In Delaware the payee must receive professional financial advice from some independent professional.
- In Florida the seller should have a third party professionals advice and it also disallows factoring of the claims of workers compensation.
- 21 days are granted to the seller by Georgia to cancel their sale of the structured settlement.
- It is a requirement in Hawaii that all important terms should be given to seller.
- In Idaho it is required that the seller should get professional advice. The workers compensation claims are disallowed.
- It is a requirement in Illinois that all the sellers should see professional advice before selling.
- In Indiana the only requirement is that the settlements for claims of workers compensations should not be factored.
- Similarly Kansas also stats that workers compensation benefits should not be factored.
- In Kentucky the requirement is that there should be a complete disclosure of important terms in document and it bars the sale of the workers compensation benefits.
- Maine required sellers to receive the professional advice from independent third party. There is also a requirement that all the interested parties should sign a form of consent for transfer of the proceed in case the transfer does not give assignment of the payments.
- In Maryland all the sellers should receive an impartial advice and it also bars claims of workers compensation from any such arrangements.
- In Massachusetts the requirement is that the sellers should receive a professional advice from independent third party.
- With regards to advice from third party, Michigan has the same law, but here is also a requirement of the consent of interested parties to transfer in case there is no liability to assign the payments. It is also stipulated by the state that discounts on settlement cannot exceed 25% a year. The workers compensation benefits cannot be factored.
- It is a requirement in Minnesota that all sellers should get independent expert advice and the sale of workers compensation claims is not allowed.
- It is a requirement in Mississippi that factoring company should give the seller with a written notice that they must get professional counsel.
- In Missouri court has to find out that payments which are made to a seller are equal to the fair market price of that structured settlement. In addition the sale of workers compensation claims is not allowed.
- The only requirement in Montana is that the workers compensation claims should not be factored.
- The requirement in Nebraska is that seller should be made aware of his rights to a professional advice. The sale of workers compensation is not allowed and there is also a requirement that finance charge or discount for agreement should not exceed minimum interest rate on a loan for the consumers.
- The only requirement in New Jersey is that the sellers should be notified of their right to get professional advice.
- In New York the requirement for the seller to be notified of his rights to seek professional advice exists. The law also states that transfer agreement should not require from the seller to pay the costs or fees of the attorney in case the transfer is not completed or to pay any other tax liability but their own. New York also doesn’t allow the sale of the workers compensation benefits.
- It is mandated in North Carolina that sellers should have professional advice. Also the interest rate or the discount of transfer should not exceed fiver percent plus prime rate of interest. The fees cannot be greater than two percent of net amount which the seller would have received. North Carolina also does not allow the sale of workers compensation benefits.
- It is a requirement in Ohio as well that the sellers should get professional advice and the sale of workers compensation is also not allowed.
- The only requirement in Oklahoma is for the seller to get professional advice.
- In Pennsylvania there is a requirement for the seller to receive advice from third party, or they should sign a waiver of the advice.
- In Rhode Island before the sale can happen, a professional advice for seller is required.
- The sale of the workers compensation benefits is not allowed in South Carolina and professional advice is required.
- In South Dakota as well, the buyer should advise seller to get professional advice.
- In Tennessee factoring company is required to advise seller to get advice from third party and the sale of workers compensation benefits is not allowed.
- The only requirement in Texas is that the seller should be advised by the buyer to seek professional advice from third party.
- In Utah the buyer is required to notify seller in written form that they should get professional advice.
- In Virginia the requirement is same as that of Utah.
- The only requirement in Washington is that the buyer should notify seller in written form, the need for an expert level advice.
Louisiana and West Virginia are two of the exceptions which have been omitted from the above list. These states are outlined here:
Louisiana: In Louisiana steps were taken in order to make things easier for those who seek the approval of the sale of the settlement. Most of the Law in Louisiana is same as federal law. However, the state has limited the judge’s power in disallowing a sale of settlement. Within the language used for the law, there is a lot of protection for the sellers.
West Virginia: The law in West Virginia states that an approval from court is needed for the sale of a structured settlement in case the settlement is because of personal injury or other types of claim and also in case the settlement amount exceeds $40,000. There are restricted right for the consumer in transferring or assigning the future payment rights as well.