Bill Clarifies Tax Treatment Of Factored Structured Settlements
By
Washington
Insurance companies are supporting an effort in Congress to clarify the tax treatment of structured settlements that are factored.
The legislation, H.R. 1514, would require those who want to convert their structured settlements into cash to return to the court that granted the original judgment and demonstrate that their circumstances reasonably justify factoring.
Without court permission, a factored structured settlement would be subject to a 40% excise tax.
Doug Bates, assistant vice president with the Washington-based American Council of Life Insurers, says the issue involves the special tax treatment granted to annuities issued to cover structured settlements.
Bates notes that the earnings on the annuity that cover the structured settlement are not taxable to the individual. One reason for this, he says, is to encourage the use of structured settlements to pay liability judgments.
However, he says, a practice recently emerged in which a company would purchase the stream of payments for the structured settlement from the individual in exchange for cash upfront, a process known as factoring.
However, Bates says, the tax code says that if an annuity receives preferential tax treatment, as is the case with a structured settlement, the payments cannot be accelerated.
But, he adds, there is confusion in the law about the tax treatment of a structured settlement after factoring. It is possible, Bates says, that the insurance company might be liable for any tax consequences even if the company had no knowledge of the factoring.
H.R. 1514, which is sponsored by Rep. E. Clay Shaw Jr., R-Fla., would clarify the tax consequences of factoring, Bates says.
Gretchen Schaefer, a representative of the Washington-based American Insurance Association, a major property-casualty group, says AIA also supports the legislation. Requiring a court to approve the sale of structured settlement will ultimately benefit the payee, she says.
In addition to H.R. 1514, Senate Finance Committee Chairman Max Baucus, D-Mont., is expected to add a similar provision to the Victims of Terrorism Relief Act, H.R. 2884, sources says.
Although the provision would initially be limited to structured settlements arising from the Sept. 11 terrorist attack, Sen. Baucus reportedly wants to expand it to all structured settlements.
Meanwhile, the House was preparing at press time to vote on a terrorism insurance bill that will contain a provision calling for a study of the impact of a major terrorist event on the life insurance industry.
