By Alejandra Mendiola and William E. Lindahl
WC Workers’ Compensation (TheCLM.org), August/September 2016, Issue 4. Volume 2.
Settling a case can be a cumbersome and time-consuming experience for all parties. When the complexities of needs-based public benefit programs such as Medicaid and Supplemental Security Income (SSI) are added to the structured settlement mix, attorneys must be vigilant to ensure that the settlements they craft comply with all applicable laws while protecting their client’s current and future benefit eligibility. In addition, this is further complicated by dual-eligible clients with Medicaid and Medicare.
Medicare as a Secondary Payer
The Medicare Secondary Payer Act (MSP), passed in 1980 by Congress, made Medicare the secondary payer for health care coverage instead of the primary payer in many cases. A primary payer can be an employer and its workers’ compensation insurance carrier or a liability insurer. The MSP was designed to reduce the financial burden on the Medicare Trust Fund. Under MSP, a beneficiary’s primary health insurance or those with the primary responsibility for paying a claim must pay the claim first before Medicare kicks in. Unlike needs-based government benefits, Medicare is an entitlement, so recipients do not generally lose eligibility. However, funds set aside in a Medical Set-Aside (MSA) to be used for future medical expenses that would otherwise be covered by Medicare are a countable asset. If the plaintiff needs to protect Medicaid and/or SSI, the MSA must be held in a special-needs trust.
According to the Social Security Administration, about 10.2 million people received federally administered SSI payments in 2013. A personal injury settlement of any size will affect needs-based public benefits for the seriously injured.
With the passage of the Patient Protection and Affordable Care Act (ACA), plaintiffs whose annual income is below the federal poverty level (FPL) are eligible for an expanded Medicaid program that does not have an asset test. States that have adopted the ACA income thresholds vary in eligibility requirements. Usually, expanded Medicaid is provided up to a level above the FPL. For example, in California, individuals qualify if their income is less than 138 percent of the FPL.
A note of caution: Expanded Medicaid does not apply to plaintiffs who are seriously injured and unable to return to work. These individuals would be placed in the traditional Medicaid program, which has an asset and income test—no more than $2,000 for an individual or $3,000 for a couple in any given month.
Special Needs Trusts (SNTs)
The most common way for a disabled individual to continue to maintain eligibility for Medicaid and SSI while also receiving settlement payments is to establish a first-party special needs trust (SNT). There are two types of SNTs: the traditional individual SNT, and a pooled special needs trust (PSNT) run by a nonprofit or charitable organization.
Settlement funds can be used for needs not covered by government programs, including additional home care, companions, vehicles, and, in some cases, a residence. When used in tandem, SNTs and structured settlements offer complementary benefits that can enhance the quality of life for severely injured plaintiffs and their families.
How SNTs Work with Structured Settlements
Personal injury cases involving structured settlements give the recipient, in some cases, a lifetime of guaranteed income to help pay for medical and other costs. If the structure is prepared correctly, the recipients can receive the structured payments for medical and other expenses and still be eligible for current or future SSI and Medicaid. If not prepared correctly, these benefits can be denied—often in later years when the injured party needs them the most.
“When used in tandem, SNTs and structured settlements offer complementary benefits that can enhance the quality of life for severely injured plaintiffs and their families.”
An individual SNT may be used only if the client is under age 65. PSNTs do not have an age restriction or limits on the size of the settlement; they must be used for any plaintiff age 65 or over.
Certain rules apply when using an SNT, whether individual or pooled:
- The client must be totally and permanently disabled, unable to work, and receiving or qualified to receive SSI, Medicare and/or In-Home Supportive Services (IHSS). Poverty and partial disability do not qualify.
- First-party individual SNTs and PSNTs protect only traditional SSI and Medicaid.
- Clients who are receiving SSI and/or Social Security Disability Insurance (SSDI) with Medicaid cannot self-administer their MSA arrangement. An MSA is a countable resource unless held in an SNT or PSNT when qualifying for SSI.
- Structured settlement payments are considered unearned income when applying for SSI.
- Always have the client go to a Social Security Administration office to get a summary of benefits letter prior to settling a case.
When doing settlement planning, it is not necessary to establish an SNT if the plaintiff is already receiving Social Security checks or SSDI. Social Security and SSDI government benefit programs are entitlements; therefore, they are not means tested. Asset and income limits do not apply, so settlement proceeds will not impact eligibility. However, SSI is means tested, so client assets, income, and future medical costs impact eligibility.
Establishing an SNT/Structured Settlement
Select professional advisers who understand the insured party’s current and long-term needs. These include a trust and estate attorney (knowledgeable in state-specific requirements, special-needs law updates, and how to obtain additional benefits), an accountant, a life care planner, and a structured settlement broker. A life care planner assesses the injuries of the plaintiff and determines future medical costs. A structured settlement broker assists in ensuring that the SNT and the structured settlement properly interface. The goal is to create a plan that will help protect the injured party and his or her family’s assets and provide resources to improve the injured party’s quality of life.
Select the SNT trustee. The trustee manages the trust assets, distributes the income and principal for qualified purposes, pays bills, keeps accurate records, and helps with trust tax return preparation. Unlike the relatively straightforward duties of trustees in a typical trust, managing an SNT is significantly more complicated. Consider hiring a trustee who provides professional fiduciary trust services or utilize a pooled trust program as the trustee.
Create the SNT. A trust and estate attorney who specializes in special-needs planning is best qualified to create an SNT and to coordinate the governmental benefits unique to each state. The trust and estate attorney can assist with the difficult decision of how much of the settlement quote If it is created correctly, the disabled individual’s life can be greatly enhanced well beyond that which the settlement alone could have provided.
“If it is created correctly, the disabled individual’s life can be greatly enhanced well beyond that which the settlement alone could have provided.”
Fund the SNT. When an SNT is funded with proceeds from a structured settlement, structured annuity payments are directly deposited into the SNT to protect the beneficiary from violating any governmental asset constraints. If specific assets are not properly transferred or earmarked to a client’s SNT, beneficiaries will be restricted from receiving supplemental government benefits.
Make sure others do not jeopardize Medicaid or SSI eligibility. Well-meaning relatives could make gifts directly to the injured individual that jeopardize the SNT. For example, a gift of more than $2,000 could negate all planning efforts because, in order to qualify for SSI, the limit for countable resources is $2,000 for an individual ($3,000 for couples). Instead, family members could make those gifts directly to the SNT.
Pooled Special Needs Trusts
A PSNT, which also protects Medicaid and SSI, has a number of features that may make it more attractive than an individual SNT. The first is its cost. The trust setup costs range from $1,000 to $5,000 annually or one percent to three percent of the assets in the trust, whichever is greater (and varies by state). In addition, most PSNT providers do not have a minimum funding amount requirement. Unlike a regular SNT, with a PSNT, the plaintiff can establish the trust directly without a parent, grandparent, guardian, or the court.
PSNT providers are nonprofit or charitable organizations that act as the trustee rather than an individual or corporate trustee. The federal statute that gives authority for a charitable organization to act as a trustee also provides an exception that allows them to enroll plaintiffs of any age, even those over age 65, whereas a private trustee or corporate trustee cannot establish an SNT for a plaintiff over 65.
Rules to Remember
When using SNTs, the structured settlement must identify the SNT as the recipient of future settlement payments (instead of the disabled individual) with the trustee of the SNT as the payee. The trust must be irrevocable, and the beneficiary must be considered disabled as determined by Social Security guidelines and under age 65. The trust must be created and funded with cash and part or all of a structured settlement at the time the settlement is created and prior to the individual’s turning age 65. Remember, there is no age requirement for a PSNT.
The trust can be used only for the benefit of the disabled individual, and at death of the disabled beneficiary, Medicaid must be reimbursed for the amount it paid for the disabled individual medical care only, up to the total amount remaining in the trust.
The greatest limitation associated with any SNT is that all funds must be spent on the plaintiff. Most restrictions on an SNT are removed for those on SSI who have taken a reduction for in-kind support and maintenance that is equal to or exceeds one third of the presumed maximum value of SSI benefits in their state. This may allow an SNT to pay for rent, food, and shelter-related expenses.
Two-Part Litmus Test
Does an injured party qualify to use an SNT? The answer to both questions below must be “Yes.”
- Are the plaintiff’s injuries so severe that the party will not be able to return to work?
- Does the client qualify or need to protect eligibility for Medicaid and/or SSI?
Putting the structured settlement and the SNT together in a settlement package is complex. If it is created correctly, the disabled individual’s life can be greatly enhanced well beyond that which the settlement alone could have provided.
Not every injured party will benefit from the SNT/structured settlement combination. Younger parties who are expected to recover and not need long-term public benefits may need only a structured settlement to meet their temporary needs. For others with long-term injuries, however, combining these two powerful tools can help achieve a higher standard of living free from financial worry.
This content provided is for informational purposes only and is not intended to be used as a guide prior to consultation with an attorney familiar with a specific legal situation.