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Understanding the Periodic Payment Settlement Act (PPSA) and the Structured Settlement Protection ActThe Periodic Payment Settlement Act (PPSA) has been around for some time. It was first signed into law by President Reagan in 1982. It’s also been part of the IRS code since that time. The purpose of the PPSA is to encourage the use of structured settlements by providing tax-free benefits – structured settlements offer a long-term solution to financial security for accident victims and their families awarded a settlement. The real benefit of the law is that it allows several different income types to be excluded from gross income when reported on income taxes. These types include:
- Money received for physical injuries
- Money received for sicknesses
- Money received for worker’s compensation cases
Changes to the Tax-Free StatusObviously, the most important change brought about by the Periodic Payment Settlement Act was the tax-free status granted to structured settlements. However, the government added a clause that trips up many annuitants. According to the language of the law, payments cannot be “accelerated, deferred, increased or decreased by the recipient”. If such changes did occur, then the tax-free status of the settlement was voided, and the injured person would have to pay taxes on it.
Interestingly, insurance companies and other third parties benefit from agreeing to take on this financial burden. The law stated that any amounts received by an assignee from gross income for agreeing to take on these payments would not be subject to taxes. So, as long as the agreement was enforced as it was issued from the judge, both the payer/assignee and the annuitant were able to benefit from income without tax implications.
The Structured Settlement Protection ActWhile the PPSA outlined above was designed to make structured settlements safe, stable financial vehicles, it was not without its problems. Another law was necessary to protect the rights of those receiving payments through both court judgments and lottery winnings. This was the SSPA, or Structured Settlement Protection Act, and it was enacted in 2002.
Interestingly, this law made it more difficult to sell a structured settlement, without making it impossible. The primary reason for the law’s enactment was to protect those receiving settlements after the 9/11 catastrophe – the law was put in place to help ensure that victims and family members were aware of their actions when selling a structured settlement. A range of protections were included with the law on the federal level, including:
- The individual selling the structured settlement should receive professional advice concerning the benefits and drawbacks of receiving a lump-sum payment.
- The individual selling the structured settlement has the right to cancel the sale within a specific, pre-set timeframe. Each state sets its own timeframe.
- Individuals selling structured settlements must be provided with full information regarding fees, charges or expenses of any type resulting from the sale.
- All sales of structured settlements must be approved by a court of law. The judge is responsible for determining whether the conditions of the sale are in the seller’s best interests, and if not, can bar the sale from proceeding.
- If the sale does not meet with court approval, there is a 40% federal excise tax applied to the transfer.
Protections for the PayeesThe entire point of the Structured Settlement Protection Act was to protect the payees – the sellers in the case of a structured settlement being exchanged for a lump sum. Structured settlements have been around for a long time in one form or another, and they gained popularity in the 1970s. However, it didn’t take long for some sellers to be taken advantage of – their lack of understanding regarding the fees associated with selling their settlement and the present value of the payments they would receive in the future was exploited. Of course, another problem was the fact that the very financial stability that structured settlements were originally intended to provide was negated. This was because many of the sellers acted irresponsibly with the lump sum once they had made the sale. They “burned through” the money very quickly, leaving nothing on which to fall back.
Action was taken on the federal and state level – to date, 43 of the 50 states have their own versions of the Structured Settlement Protection Act, although they vary considerably from one state to another. Most states have exceptions, others have unique requirements in their language. Here’s a look:
- Alabama requires that payees have detailed financial and legal disclosure before the transfer can occur.
- Alaska requires key terms to be disclosed to the seller, and the seller muse also have independent professional advice concerning the implications.
- Arizona states that the seller has to be advices in writing to seek the counsel of an independent professional.
- California requires that the buyer has to advise the seller of their right to counsel regarding the petition, and that the buyer should pay fees for that counsel up to $1,500. The California Office of the Attorney General must receive a copy of the transfer agreement, and workers’ compensation claims cannot be factored.
- Colorado states that the seller has to be advised in writing to seek professional, independent advice and disallows factoring for workers’ compensation.
- Connecticut requires that the seller be notified in writing to seek professional third party guidance.
- Delaware sates that the payee has to receive financial advice from an independent professional.
- Florida states that the seller has to have advice from a third party professional, and disallows the factoring of workers’ compensation claims.
- Georgia grants sellers 21 days to cancel the sale of their structured settlement.
- Hawaii requires that all key terms in the agreement be provided to the seller.
- Idaho provides a provision that the seller must seek professional advice, and workers’ compensation claims are disallowed.
- Illinois requires that all sellers seek out professional advice prior to the sale.
- Indiana only requires that structured settlements for workers’ compensation claims not be factored.
- Kansas states that no workers’ compensation benefits can be factored.
- Kentucky requires the full disclosure of key terms in the document, and bars workers’ compensation benefits from being sold.
- Maine requires that all sellers receive professional advice from an independent party, and that all interested parties have to sign a consent form for the transfer to proceed if the transfer doesn’t provide assignment of payments.
- Maryland also requires that all sellers receive impartial advice, and bars workers’ compensation benefits from such arrangements.
- Massachusetts stipulates that all sellers must receive professional advice from an independent party.
- Michigan has the same law regarding third party advice, but also requires that all interested parties consent to the transfer if there is no ability to assign payments. The state also stipulates that the discount on the settlement cannot be greater than 25% per year, and no workers’ compensation benefits can be factored.
- Minnesota requires all sellers to receive independent, expert advice, and does not allow workers’ compensation claims to be sold.
- Mississippi requires that the factoring company provide the seller with written notice that they should seek professional counsel.
- Missouri states that the court has to find that the payments made to the seller are equate to the “fair market value of the structured settlement rights being transferred”. In addition, workers’ compensation settlements cannot be sold.
- Montana only stipulate that no workers’ compensation benefits settlements can be factored.
- Nebraska requires that the seller be told of their rights to professional advice, bars workers’ compensation settlement sales, and requires that the discount or finance charge for the agreement not exceed the maximum rate of interest on a loan for consumers.
- New Jersey only requires that sellers are notified that they have the right to get advice from a professional.
- New York states that the seller has to be notified of his or her rights to professional advice, and states that the transfer agreement cannot require the seller to pay the attorney fees or costs if a transfer is either not completed or to pay for any tax liability but their own. Like most other states, New York does not allow workers’ compensation benefits to be sold.
- North Carolina mandates that all sellers have professional advice, and that the discount or interest rate of the transfer cannot exceed the prime interest rate plus five percent. No fees can exceed two percent of the net amount the seller would have been paid. And again, no workers’ compensation settlements can be sold.
- Ohio also requires that sellers receive professional advice first, and bars the sale of workers’ compensation benefits.
- Oklahoma only requires that the seller receive professional advice.
- Pennsylvania also requires that the seller receive third party advice, or that they sign a waiver of such advice.
- Rhode Island requires professional advice for the seller before the sale can proceed.
- South Carolina requires professional advice and does not allow the sale of workers’ compensation benefits.
- South Dakota requires that the buyer must advise the seller to seek professional advice before the sale.
- Tennessee states that the factoring company must advise the seller to seek third party advice, and does not allow the sale of workers’ compensation benefits.
- Texas only requires that the buyer advise the seller to seek professional, third party advice before the sale.
- Utah requires the buyer to notify the seller in writing that they should seek professional advice.
- Virginia has the same requirement as Utah, stating that the buyer must advise the seller in writing to seek third party, expert advice.
- Washington only requires that the buyer notify the seller in writing of the need for expert advice.
There are two notable exceptions omitted from the list above – West Virginia and Louisiana. Those states are outlined below.West Virginia – West Virginia’s law states that court approval is required for the sale of the structured settlement if the settlement stems from a personal injury or other type of claim, and if the amount of the settlement transfer is more than $40,000. The consumer has restricted rights in assigning or transferring future payment rights as well.
Louisiana – Louisiana took steps to make things a little easier on those seeking approval for the sale of their settlement. While most of the Louisiana law is the same as the federal law, the state limits the power of judges in disallowing the sale of settlements. The law also builds in lots of protection for sellers within the language used.