Indemnity benefits, designed to partially replace weekly income, are critical to workers’ compensation cases. Depending on the severity of the injuries and the limitations of the state statute, these benefits could provide weekly checks for a specific number of weeks or for a lifetime, typically at 60-662⁄3% of the individual’s average weekly wage.
As I work with employers, claims professionals and injured individuals to resolve workers’ compensation claims with structured settlements, the question arises if structuring indemnity benefits is a good idea. Why replace one set of weekly payments with another?
The answer is simple: not all weekly benefits are created the same.
Here is my perspective on the good, the bad and the ugly to consider when settling the indemnity benefits a workers’ compensation claim with a structure.
“The Good”
As a critical safety net for over a century, workers’ compensation is designed to minimize burdens of proof, maximize security and limit damages for workplace injuries. Instead of a ceiling, it is a tax-favored floor for benefits. And floors—financial as much as architectural—should never to be taken for granted, especially when planning for the ceilings.
“The Bad”
Workers’ compensation indemnity benefits have some significant limitations that often lead to settlement discussions:
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INCOME CAPS
By definition and calculation, the injured individual cannot return to pre-injury income with benefits. Depending on your politics, you may think of this as fair for different reasons. Similarly, the capacity to return to part-time or modified-duty employment is also capped.
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BENEFIT COORDINATION LIMITATIONS
If the injured worker is supplementing these indemnity benefits with other disability benefits (like SSDI) or need-based entitlements (SSI or AFDC), the injured individual has income limitations.
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LOSS OF LIFE, LOSS OF INCOME
Some states continue these wage-replacement workers’ compensation benefits for widows, widowers and dependents upon the death of the injured worker. Almost all states limit the applicability, duration and percentage of wage replacement that such benefits provide to the family left behind. Also, dependents over the age of 25 and household dependents outside statutory definitions (such as parents or grandparents) are typically excluded from benefits.
“The Ugly”
With all its statutory caps and restrictions, workers’ compensation benefits for the primary (or significantly contributing) wage earner are unlikely to provide for a family. Once the claimant has reached maximum medical improvement, settling for the outstanding statutory entitlement of the claim might be the best option. As detailed below, a settlement can mitigate or eliminate barriers to other forms of income that workers’ compensation benefits can raise.
THE WISDOM OF A STRUCTURE
A workers’ compensation settlement with a structure provides a unique way to blend significant security with the removal of all restrictions. It’s floor and ceiling. It’s the good and the better without the bad or the ugly. Let’s take each in turn.
INCOME CAPS
Because the settlement itself removes the workers’ compensation benefits from the limitations of the state statute and regulations, many of the restrictions of the workers’ compensation system are removed (as some portion of the outstanding value of benefits is realized). Whether you are a retiree in Arizona who does not want to travel back to California for treatments and utilization review, or a worker who has mastered a new trade and is constrained from taking a promotion, settlement can be a welcome answer.
While the benefits can be achieved with any kind of settlement, a structure enables you to create ongoing, highly secured, tax-free income. It’s like having a second, tax-free salary for the family. While a settlement should also include cash, ongoing income can be invaluable.
BENEFIT COORDINATION
Here again, settlement can create some of the freedom the injured individual seeks, but may not maximize its value. Let’s say, for example, that an individual is receiving SSDI and workers’ compensation benefits. Settling the workers’ compensation claim may create an opportunity to secure the same benefits from one check (SSDI), instead of two (SSDI & Workers’ Compensation) because of state and federal offset provisions. However, because most states default to apportioning a lump sum by the outstanding weeks of benefits and the weekly amount, that may not be successful. With a structure, the policy specifies the number of weeks. The injured individual may stretch the number of weeks out over many more years, reduce the weekly pro rata share and, ultimately, realize far more in weekly SSDI benefits with a structure than with a lump sum settlement.
If significant, ongoing medical needs exist, a structure can be combined with a special needs trust to further maximize the coordinated value of those benefits in governmental, needs-based programs as well. In addition to increasing the benefit in both examples, the security of those tax-free benefits is nearly impossible to replicate.
LOSS OF LIFE, LOSS OF INCOME
In addition to all these considerations, the weekly benefits from a structure can survive death without any constraints on time, coverage or value. With a whole class of structured settlement annuities, named beneficiaries can inherit the same structured settlement annuity payment that the injured individual enjoyed. There are no limits on time, no reduction in benefits and no restrictions on who is eligible. In addition, because named beneficiaries are named in the policy, assigned payments avoid contested wills and probate challenges.
Protections before death are invaluable too. Structures, considered policies instead of assets, are often immune from creditors, bankruptcy and divorces. Lump sum cash, on the other hand, is vulnerable.
Settlements with structures eliminate most of the restrictions provided by indemnity benefits arising from workers’ compensation injuries—while maximizing the security and value of the settlement. It’s far from trading one set of payments for another. It’s offering the beneficial good over the bad and the ugly.
