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We Made it!  Now What?

The Mayans had it wrong and our leaders in Washington somehow saved the day: global Armageddon didn’t get us and neither did the “fiscal cliff”. Having survived such terrors, one can only wonder: now what? I can’t see into the future any better than the Mayans could, but I can identify some issues that will affect claims resolution during 2013.

Tax rates are up across the board. Whether you consider payroll taxes, federal taxes, capital gains, or personal exemptions, few people will be unaffected by the changes. Higher taxes naturally increase the value of structured settlement income streams and that will surely be true in the coming year. Technically, you may wish to be aware of the following (1):

- Federal Insurance Contributions Act (FICA) taxes went back up to 6.2 from the
   4.2 they were temporarily reduced to in the stimulus (2).
- Taxes on capital gains and dividends rise to 20% percent from 15%.
- Health care reform levies a new surtax of 3.8 percent on capital gains for
   some people, pushing the top capital gains rate up to 23.8 percent.
- The top income tax bracket was increase to 39.6% from 35%.
- The Personal Exemption Phase-out (PEP) and the itemized deduction limit
   rules will reduce or eliminate the value of personal exemptions for some
   taxpayers.

Issues related to the Medicare Secondary Payer Act (“MSP”) will continue to require examination in liability cases (3). Most people involved with personal injury settlements have by now at least heard of the MSP and we will all have to continue to stay knowledgeable about the impact this law may – or may not yet– have on a given claim as the year progresses.

A “Medicare set-aside” (the established mechanism for addressing this issue in workers’ compensation) may or may not be needed and may or may not work quite the same way in liability as it does in comp.

Pay particular attention to claimants who might qualify for both Medicare and Medicaid. Extra care must be taken in these circumstances because you have more moving parts and everything has to fit together properly. Unless you understand the interplay between Medicare and Medicaid, you might not think about this possibility at the time of the settlement and that could be a costly mistake.

A quick refresher: Medicaid is state-run and “means-tested”, meaning that a claimant generally has to be impoverished to qualify. Medicare is federally administered and a form of insurance earned through payroll-deducted payments made over time. A person can qualify for Medicare but actually also need Medicaid; the coverages are not the same. If you establish a sum of money in a “set-aside” to address the MSA issue, might you inadvertently also disqualify that person from Medicaid because now an “asset” exists for their benefit?

A solution can often be designed to minimize this risk, but the facts of each case must be examined carefully by qualified experts. Generally, Medicaid is set up as a supplement to Medicare, paying the Medicare premiums, deductibles, and co-insurance providing services that are not provided by Medicare (such as long term care and home health). Don’t be surprised to find prescription benefits in the mix as well (Medicare Part D) for dually eligible beneficiary in an MSP situation.

Dual eligibility for Medicare and Medicaid is only one of many issues you must try to develop an awareness of. Hurdles still exist when sorting through the various conflicts of law between the MSP, Medicare policies, and each state’s individual Medicaid statutes and recovery rights. The ability to craft a settlement which safely weaves through this tricky path will be essential as 2013 progresses.

Structured Settlements continue to deliver proven solutions. As mentioned before, higher tax rates naturally make structured settlements more valuable because Section 104-qualified structures are exempt from all the taxable incomes listed above: federal and state income tax, interest, payroll taxes, dividends and capital gains.

But the “peace of mind” which many associate with a guaranteed income stream has never been more valuable to claimants. People are not only funding “employment security blanket” plans (guaranteed income regardless of employment), but they are finally beginning to put real money away for retirement. The absence of any limit on the size of a retirement contribution allows people to catch up in a hurry and the non-taxability is always popular.

Structured settlements funded by life insurance annuity contracts remain one of the safest possible means of assuring future income. State insurance laws require the establishment of a “reserve” for every issued contract, the states strictly regulate the companies authorized to do business in their states and “guaranty associations” have been established in all fifty states as added consumer protection.

We survived the drama surrounding the close of 2012 and we certainly do not need any more drama in claim settlements during 2013. Interested in employing a settlement tool which measurably increases the value of settlements while offering innovative protections? Call Frank C. Kilcoyne, CSSC at 800 544 5533. I am here to help.

1) Jill Schlesinger,“What the "Fiscal Cliff" Bill Means to Taxpayers” CBS MoneyWatch January 1, 2013
2) Contributions to federal Social Security and Medicare programs on incomes up to $113,700
3) Jennifer C. Jordan, The Complete Guide to Medicare Secondary Payer Compliance, (Mathew Bender, 2012)