The 1-2-3s Of Structured Annuities
Structured annuities can be great tools to reduce overall costs of settlement, and still provide the Claimant with a source of ongoing income. The advantages are many to insurers and self-insurers, as well as for Claimants who are concerned about budgeting their settlement over the long-haul, or those that prefer to simply continue receiving checks.
But, like any plan that budgets money, structures contain a lot of hidden details and many variables. The following is meant to be a quick primer on the basics of structured annuities.
Parts of an Annuity
Upfront Cash – This amount designates the cash that will be paid to the Claimant upon Board approval of the Stipulation. Since this is the only liquid portion of settlement, the attorney’s fees and expenses come out of this amount. Thus, to induce settlement, the upfront cash should account for extra padding, so that the Claimant is left with some money after fees and costs are deducted.
Payment per Period – Each annuity usually contains a provision for a sum certain per week, month, or year, to start on a future date, and conclude within a period certain, or extend for the life of the Claimant.
Annuity Cost – Often forgotten, this is the most important figure in an annuity – the cost of purchasing the account. Many people tend to focus on the upfront cash, or in the case of an MSA, on the seed money, and forget that the price of the account itself needs to be considered.
Seed money – In an annuitized MSA, the seed money generally consists of the first two years of payment, and this is paid to the Claimant upon approval of the Stipulation by the Board. The purpose is to provide some initial funding while the MSA trust matures. In cases where the recommended seed money is substantial, and CMS approval of the MSA is necessary, it is smarter to pay half of the seed money upon settlement, and pay the balance upon CMS approval. This allows for the possibility that CMS may decrease the amount of the seed money, and if so, then we simply pay less in the second installment, rather than attempting to chase down the Claimant to reimburse an overpayment.
Assignment Fee – Usually only about $500.00, the assignment fee is the charge to make the qualified assignment, and should be added when contemplating the overall cost of purchasing a structure.
Attorney’s Fees – Attorney’s fees are determined as 25% of the present-day value (or cost) of the settlement, and it is deduced from the upfront cash. For example, if an annuity account costs $75,000.00, and will include upfront cash of $50,000.00, the total is $125,000.00 (and this excludes the assignment fee, or any medically-related parts of the annuity, like seed money, which are not subject to attorney’s fees). Attorney’s fees would then be 25% of the $125,000.00, or $31,250.00, and this amount would come out of the $50,000.00 allocated for upfront cash.
The factor that tends to stop Claimants dead in their tracks is the thought of receiving a check that isless than what they are already receiving on workers’ compensation. But, fortunately, there are several factors the broker can play with to ensure a payment that works best for the Claimant. The basic variables are outlined below.
Period of Payments – An annuity can pay a claimant weekly, monthly, yearly, or set forth periodic lump-sum payments. More complex plans sometimes include a combination of monthly payouts, plus a lump-sum every few years.
Duration – Obviously the longer the payments are stretched out, the more time the account has to accrue interest. Thus, annuities that pay out over a period of at least 20-years, tend to yield the most gain for Claimants. Annuities of five years or less will yield very little, if any, over the actual cost.
Amount of Payment – As with duration, the smaller the monthly or annual payment, the longer the premium has to gain interest.
Guarantee – In a guaranteed annuity, the payments are guaranteed for a period certain, and if the Claimant dies during that period, she can have the payments transfer to a designated beneficiary. Many Claimants choose an annuity that is guaranteed for a few years (for example 10), but then becomes life-contingent thereafter.
While annuities are great tools, conforming them to comport with Board Rule 15 and fit in a workers’ compensation Stipulation requires some specialized language. Below are some tips to include to help expedite approval.
Total payout – While we should state the amount of payments, the start date, and period of payment, we also need to include an estimate of the annuity’s total payout. In other words, if the annuity will pay out $500.00 monthly for 20-years, beginning on January 1, 2010, the Board would like to know what the account should yield at the end of the 20-year period. This is especially important for MSAs, because per Board Rule 15(d), the actual cost of the MSA must be included in the Stipulation, and the Board Settlement Unit also requests that we identify the estimated lifetime payout of the MSA. Fortunately, information regarding the total payout of all annuities are readily available on the quote provided by the broker.
Seed Money/Changes upon CMS Approval (for MSA annuities) – If the seed money is to be divided, you may want to add the following language to both the consideration paragraph, as well as any portion of the Stipulation (or Addendum) that refers to the MSA. “The parties agree that this MSA shall be submitted to the Centers for Medicaid and Medicare Services for approval. In anticipation of any changes to the MSA by CMS, the parties agree that the Employer/Insurer (or Self-Insurer) agree to pay half of the above-stated seed money upon approval of this Stipulation and Agreement by the Board. The balance of the seed money shall be paid upon CMS approval of the MSA.” Using the term “balance” allows for the fact that CMS may increase or decrease the seed money, and more or less than “half” may be due.
Changes without Further Board Approval (for MSA annuities) – Although the Board mandates that we state the basic terms of the MSA, the Board also recognizes that it does not have much jurisdiction to make determinations as to the sufficiency of the MSA. Thus, the Board prefers that any chances to them MSA be made without the need for further approval by the Board. However, it helps to put in language to this effect. Thus, you can insert the following to assure that. “The parties agree that the Employer/Insurer (or Self-Insurer) may alter the amounts of payments, duration, start date, period of payments, and may increase or decrease the total cost, as CMS mandates without further approval by the Board.” This allows you to make any adjustments, if necessary, to the annuity without having to submit a separate Addendum to the Board.
Refund to the Employer/Insurer (for MSA annuities) – On rare occasions, CMS will decrease the seed money, or recommend a lower period of payments, which decreases the overall cost. Since the annuities are often purchased before MSAs are submitted to CMS, you may want to consider a provision which leaves no doubt as to the refund of any overpayment. “In the event that CMS decreases any portion of the MSA or seed money, the Employer/Insurer (or Self-Insurer) are entitled to a refund of any overpayment for the same.”
Employer/Insurer’s Guarantee – In all annuities, whether for indemnity, non-Medicare medical expenses, or MSAs, Board Rule 15(d) requires that the Employer/Insurer stand behind any settlement agreement where a third-party is making the periodic payments, in the event the third party defaults or fails. Thus, the following can be inserted after the consideration paragraph. “The Employer/Insurer agree to be liable for the above-mentioned payments, in the event of default or failure by (Assignee).”
Hartman Language – Many have asked how to adjust the Social Security offset when there is no lump-sum settlement. What we have used, based on advice by one of the brokers we used is the present-day value of settlement, minus attorney’s fees, or obvious medical costs. Let us assume that we have a settlement involving a structured indemnity payment and a separate MSA. The present-day value of the settlement is simply the costof purchasing the annuity account, plus any upfront cash to the Claimant. To determine the Claimant’s portion, you have to subtract attorney’s fees and expenses, and also subtract out the assignment fee and the MSA. The remainder is the portion of settlement that will be paid to the Claimant, and can be divided by the Claimant’s life expectancy to arrive at the estimated weekly offset.
SITF Requirements – Finally, as the Subsequent Injury Trust Fund comes to a close, it is important to remember that in any Stipulation involving the Fund, that three quotes must be obtained for any structured MSA, and the Fund will not execute Stipulations with substantial MSA language. Thus, it is enough to simply mention the period, duration, amount, and expected payout of the MSA annuity, and place the remaining details in an Addendum that will be an Exhibit to the Stipulation.
Structures can be complex, and naturally, require more detailed Stipulations that “regular” settlement. But properly utilized, they can be effective means to reduce costs on catastrophic claims and help shrink out-of-control MSAs into feasible settlements.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley