The Settlement Alliance

What is a Non-Qualified Settlement?

What is a Non-Qualified Settlement?

Oct 29, 2014

Most people have heard of structured settlements—many even know that structures purchased with the proceeds from personal injury and wrongful death settlements provide tax-free, long-term income. What is less well-known, though, is the potential tax savings for other types of cases. There are many types of settlements that fall into the category of “non-qualified assignments” or “non-qualified structured settlements.” The non-qualified settlement can provide impressive tax savings and guaranteed long-term income.

Qualified Settlements

First, it’s important to define what a qualified settlement is. Internal Revenue Code §104a(2) stipulates that settlement proceeds from certain types of cases, including personal injury and wrongful death, are 100% tax free. If the claimant wants to receive periodic payments via a structured settlement annuity, the defendant must assign their liability to an assignment company, which then purchases the structured settlement annuity. These types of settlements are considered “qualified assignments,” meaning that they qualify for exclusion from income tax under §104a(2).

Non-physical injury settlements, on the other hand, do not qualify for income tax exclusion. However, there are still strategies to preserve these types of settlements and in many cases, develop a plan that offers tax savings.

Non-Qualified Settlements

If a claimant involved in a non-qualified settlement (i.e. one that does not qualify under §104a(2)) accepts their proceeds in a lump sum, the entire lump sum will be taxed at the highest applicable tax rate. It is reasonable to assume that in most cases, a large lump sum will bump a claimant into a higher tax bracket.

On the other hand, if a non-qualified structured settlement is used, the claimant could be taxed at a lower rate and enjoy the benefits of receiving regular, long-term income in the form of periodic payments. For settlements involving regular payments (e.g. divorce settlements involving alimony and/or child support), the non-qualified structured settlement could be a useful tool to fund the payments.

The non-qualified structured settlement works much the same as a qualified structured settlement in terms of process—the defense and plaintiff come to an agreement, then execute a settlement agreement and release that includes the ability to receive the settlement in periodic payments. The actual schedule of periodic payments depends on the chosen funding instrument—either an annuity or select other funding options.

Cases That May Benefit From a Non-Qualified Settlement

There are many different types of cases in which a non-qualified settlement is a possibility, including:

  • Age Discrimination
  • Americans With Disabilities Act
  • Athletes Endorsement Fees
  • Attorney Fee Deferrals
  • Celebrity Endorsement Fees
  • Construction Defects
  • Divestment
  • Divorce Settlements
  • Environmental Settlements
  • Legal Fee Disputes
  • Legal Malpractice/Professional Errors and Omissions
  • Race Discrimination Settlements
  • Sexual Harassment Settlements
  • Structured Sales
  • Wrongful Termination Settlements

If you or a client is involved in a lawsuit, contact a settlement planning professional before deciding how to manage the settlement. Without expert guidance, you could be missing out on valuable tax savings.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential