Structured settlements are a vital tool for individuals receiving significant settlement awards, providing financial security through periodic payments. But not all structured settlements are created equal—understanding the distinction between “qualified” and “non-qualified” structured settlements is essential to making informed financial decisions. These terms primarily hinge on tax treatment and the type of claim being settled.

What Are Qualified Structured Settlements?

Qualified structured settlements are governed by the Internal Revenue Code (IRC) Section 130. They are most commonly associated with cases involving personal physical injuries or physical sickness. Here’s how they work:

1. The defendant or their insurer initially commits to paying periodic settlements to the claimant.
2. This obligation is transferred to a third party, known as the assignee, under the provisions of IRC Section 130.
3. Once the transfer occurs, the defendant’s liability is extinguished, and the assignee assumes responsibility for future payments.

From a tax perspective, qualified structured settlements offer a significant benefit: the periodic payments are entirely excluded from the recipient’s taxable income under IRC Section 104(a)(2). This makes them an attractive option for claimants seeking long-term financial stability.

For the assignee, the funds used to purchase the annuities or U.S. Government obligations needed to fulfill the payment obligations are also excluded from taxable income, provided that seven key criteria under Section 130 are met. These criteria ensure the payments remain fixed, predictable, and secure for the recipient.

Qualified structured settlements are typically used in personal injury or physical sickness claims but can also be applied in other scenarios, such as attorney fee arrangements, if structured through a Qualified Settlement Fund (QSF).

What Are Non-Qualified Structured Settlements?

Not all claims involve personal physical injury or sickness. For cases like employment disputes, discrimination, or divorce, a non-qualified structured settlement is an alternative. These settlements function similarly to qualified ones but do not meet the strict requirements of IRC Section 130.

Key distinctions include:

• Tax Treatment: While qualified settlements exclude periodic payments from taxable income, non-qualified settlements defer taxation until payments are actually received by the claimant.
• Case Types: Non-qualified structured settlements cover a wide range of cases, such as wrongful termination, emotional distress, punitive damages, and even attorney fees.

In these scenarios, the assignee receives funds to purchase the annuities supporting the payment obligations. However, because these cases fall outside the purview of Section 130, the assignee must pay corporate income tax on the amount received. To minimize this tax burden, many providers use non-domestic assignment companies in jurisdictions with favorable tax laws, such as Barbados or Ireland.

Designing Payment Plans for Diverse Needs

Non-qualified structured settlements offer significant flexibility in how payments are structured. Options include deferred payments, lump sums, fixed-period payments, or even lifetime payments. This flexibility allows claimants and their advisors to design a payout plan that aligns with their financial needs and goals.

Empowering Financial Choices with Structured Settlements

Whether a structured settlement is qualified or non-qualified depends largely on the type of claim and the tax implications. Qualified settlements are ideal for personal injury cases where tax exclusion provides a distinct advantage. On the other hand, non-qualified settlements provide solutions for cases that don’t meet Section 130 requirements but still benefit from structured periodic payments and deferred tax obligations.

Structured settlement providers, such as Independent Life, play a crucial role in offering tailored solutions. Their expertise in both qualified and non-qualified settlements ensures that claimants, attorneys, and settlement planners have access to the right tools to secure their financial futures. By leveraging both domestic and international assignment companies, providers can deliver customized and reliable payment plans to suit a broad spectrum of needs.

In the end, understanding the nuances between qualified and non-qualified settlements empowers claimants and their advisors to make strategic choices, ensuring settlements are not just a resolution to legal matters but a foundation for lasting financial well-being.