By Jason D. Lazarus, J.D., LL.M., CSSC, MSCC
Because most of a lawyer’s malpractice exposure at settlement is related to public benefit preservation, it is important to understand the basics of these benefits. Ethically, a lawyer must be able to explain these matters to the extent that the client is informed sufficiently to make educated decisions. There are two primary public benefit programs available to those who are injured and disabled. The first is the Medicaid program and the intertwined Supplemental Security Income benefit (“SSI”). The second is the Medicare program and the related Social Security Disability Income/Retirement benefit (“SSDI”). Both programs can be adversely impacted by an injury victim’s receipt of a personal injury recovery. Understanding the basics of these programs and their differences is imperative to protecting the client’s eligibility for these benefits.
Medicaid and Supplemental Security Income (hereinafter SSI) are income and asset sensitive public benefits which require special planning to preserve. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. This is very important, as it is imperative in most situations to preserve some level of SSI benefits if Medicaid coverage is needed in the future. SSI is a cash assistance program administered by the Social Security Administration. It provides financial assistance to needy, aged, blind, or disabled individuals. To receive SSI, the individual must be aged (sixty-five or older), blind or disabled and be a U.S. citizen. The recipient must also meet the financial eligibility requirements. Medicaid provides basic health care coverage for those who cannot afford it. It is a state and federally funded program run differently in each state. Eligibility requirements and services available vary by state. Medicaid can be used to supplement Medicare coverage if the client is eligible for both programs. For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles. Medicaid and SSI are income and asset sensitive, therefore, creation of a special needs trust may be necessary which is described in greater detail below.
Medicare and Social Security Disability Income (hereinafter SSDI) benefits are an entitlement and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough quarters into the system can receive disability benefits regardless of their financial situation. The SSDI benefit program is funded by the workforce’s contribution into FICA (social security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled. Medicare is a federal health insurance program. Medicare entitlement commences at age sixty-five or two years after becoming disabled under Social Security’s definition of disability. Medicare coverage is available again without regard to the injury victim’s financial situation. A special needs trust is not necessary to protect eligibility for these benefits. However, the Medicare Secondary Payer Act (MSP) may necessitate the use of a Medicare Set Aside discussed in greater detail below.
Laws that Impact Settlement
In order to properly advise personal injury victims about their legal options at settlement, an attorney first must know and understand the laws that impact settlement. There are important federal laws that can impact a client’s eligibility for public benefits post settlement that must be explained. There are also financial options provided for under the Internal Revenue Code that should be explored. These issues are laid out in more detail with a focus on the ethical and malpractice issues raised in discussing the form of a personal injury settlement.
The Medicare Secondary Payer Act: §1862(b) of the Social Security Act
A client who is a current Medicare beneficiary or reasonably expected to become one within 30 months should concern every trial lawyer because of the implications of the MSP. The Medicare Secondary Payer Act (“MSP”) is a series of statutory provisions enacted in 1980 as part of the Omnibus Reconciliation Act with the goal of reducing federal health care costs. The MSP provides that if a primary payer exists, Medicare only pays for medical treatment relating to an injury to the extent that the primary payer does not pay. The regulations that implement the MSP provide “[s]ection 1862(b)(2)(A)(ii) of the Act precludes Medicare payments for services to the extent that payment has been made or can reasonably be expected to be made promptly under any of the following” (i) Workers’ compensation; (ii) Liability insurance; (iii) No-fault insurance.”
There are two issues that arise when dealing with the application of the MSP: (1) Medicare payments made prior to the date of settlement (conditional payments) and (2) future Medicare payments for covered services (Medicare set asides). Since Medicare isn’t supposed to pay for future medical expenses covered by a liability or Workers’ Compensation settlement, or a judgment or award, Centers for Medicare & Medicaid Services (CMS) recommends that injury victims set aside a sufficient amount to cover future medical expenses that are Medicare covered. CMS’ recommended way to protect an injury victim’s future Medicare benefit eligibility is establishment of a Medicare Set Aside (“MSA”) to pay for injury related care until exhaustion.
In certain cases, a Medicare Set Aside may be advisable in order to preserve future eligibility for Medicare coverage. A Medicare set aside allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare covered healthcare. The funds in the set aside can only be used for Medicare covered expenses for the client’s injury related care. Once the set aside account is exhausted, the client gets full Medicare coverage without Medicare looking to their remaining settlement dollars to provide for any Medicare covered health care. In certain circumstances, Medicare approves the amount to be set aside in writing and agrees to be responsible for all future expenses once the set aside funds are depleted.
The problem is that MSAs are not required by a federal statute even in Workers’ Compensation cases where they are commonplace. There are no regulations, at this time, related to MSAs either. Instead, CMS has intricate “guidelines” and “FAQs” on their website for nearly every aspect of set asides from submission to administration. There are only limited guidelines for liability settlements involving Medicare beneficiaries. Without codification of set asides, there are no clear-cut appellate procedures from arbitrary CMS decisions and no definitive rules one can count on as it relates to Medicare set asides. While there is no legal requirement that an MSA be created, the failure to do so may result in Medicare refusing to pay for future medical expenses related to the injury until the entire settlement is exhausted. There has been a slow progression towards a CMS policy of creating set asides in liability settlements over the last seven years as a result of the Medicare Medicaid SCHIP Extension Act’s passage. This creates a difficult situation for Medicare beneficiary-injury victims and contingent liability for legal practitioners as well as other parties involved in litigation involving physical injuries to Medicare beneficiaries given the uncertainty surrounding the need to create a set aside. There appear to be regulations on the horizon for set asides based upon a Notice of Proposed Rulemaking from CMS entitled “Medicare Secondary Payer and Future Medicals”.
Special Needs Trusts: 42 U.S.C. §1396p(d)(4)
The receipt of personal injury proceeds by someone seriously injured can cause ineligibility for means based tested government benefit programs. Medicaid and SSI are two such programs. However, there are planning devices that can be utilized to preserve eligibility for disabled injury victims. A special needs trust (SNT) can be created to hold the recovery and preserve public benefit eligibility since assets held within a special needs trust are not countable resources for purposes of Medicaid or SSI eligibility. The creation of special needs trusts is authorized by the federal law. Trusts commonly referred to as (d)(4)(a) special needs trusts, named after the federal code section that authorizes their creation, are for those under the age of sixty five. However, another type of trust is authorized under the federal law with no age restriction and it is called a pooled trust, commonly referred to as a (d)(4)(c) trust. These trusts are described fully below.
A personal injury recovery can be placed into a SNT so that the victim can continue to qualify for SSI and Medicaid. Federal law authorizes and regulates the creation of a SNT. The 1396p provisions in the United States code govern the creation and requirements for such trusts. First and foremost, a client must be disabled in order to create a SNT. There are three primary types of trusts that may be created to hold a personal injury recovery each with its own requirements and restrictions. First is the (d)(4)(A) special needs trust which can be established only for those who are disabled and are under age sixty-five. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. It can only be established by a parent, grandparent, guardian or court order. The injury victim can’t create it on his or her own. Second is a (d)(4)(C) trust, typically called a pooled trust that may be established with the disabled victim’s funds regardless of age. A pooled trust can be established by the injury victim unlike a (d)(4)(A). Third and last is a third party SNT which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, charity, etc. . .) for the benefit of the personal injury victim. The victim still must meet the definition of disability.
Dual Eligibility: The Intersection of Medicare and Medicaid – SNT/MSA
If you have a client who is a Medicaid and Medicare recipient, extra planning may be in order. If it is determined that a Medicare Set Aside is appropriate, it raises some issues with continued Medicaid eligibility. A Medicare Set Aside account is considered an available resource for purposes of needs-based benefits such as SSI/Medicaid. If the Medicare Set Aside account is not set up inside a SNT, the client will lose Medicaid/SSI eligibility. Therefore, in order for someone with dual eligibility to maintain their Medicaid/SSI benefits the MSA must be put inside a special needs trust. In this instance you would have a hybrid trust which addresses both Medicaid and Medicare. It is a complicated planning tool but one that is essential when you have a client with dual eligibility.
Periodic Payments: §104(a)(2) of the Internal Revenue Code
When any physical injury victim recovers money either by settlement or by verdict, the question of the tax treatment of said recovery arises. As long as it is compensation for personal physical injuries it is tax-free under Section 104(a)(2) of the Internal Revenue Code. Section 104(a)(2) of the Internal Revenue Code states that “gross income does not include . . . the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.” Section 104(a)(2) gives the personal injury victim two different financial options for their recovery, lump sum or periodic payments.
The first option is to take all of the personal injury recovery in a single lump sum. If this option is selected, the lump sum is not taxable, but once invested, the gains become taxable and the receipt of the money will impact his or her ability to receive public assistance. A lump sum recovery does not provide any spendthrift protection and leaves the recovery at risk for creditor claims, judgments and potential rapid dissipation. The personal injury victim has the burden of managing the money to provide for their future needs be it wage loss or future medical. The second option is receiving “periodic payments” known as a structured settlement instead of a single lump sum payment. A structured settlement’s investment gains are never taxed, it offers spendthrift protection and the money has enhanced protection against creditor claims as well as judgments. A structured settlement recipient can avoid disqualification from public assistance when a structured settlement is used in conjunction with the appropriate public benefit preservation trust.
If a structured settlement is to be used for someone eligible for needs based public benefits such as Medicaid and/or SSI, it is vitally important that a plan be properly constructed to avoid disqualification. A structured settlement alone will never preserve public benefit eligibility and may in fact cause permanent disqualification when lifetime benefits are involved. For example, in Sams v. DPW , a Pennsylvania court found that the purchase of a structured settlement as part of a personal injury settlement was a transfer of assets for less than fair market value, causing disqualification from needs-based benefits for the recipient. To avoid this sort of outcome, it is necessary that a structured settlement’s payments be irrevocably assigned to a properly created special needs trust. According to a 2006 Social Security Administration letter, “if the beneficiary of a trust which is not a resource for SSI has no right to anticipate, sell or transfer the annuity payments, the payments from a structured settlement annuity that are irrevocably assigned to an SNT, are not income to the trust beneficiary when paid into the trust.” In addition, under the Sams decision, payments should begin immediately into the trust. They cannot be deferred, and the death beneficiary of future payments should be the special needs trust so as not to frustrate federal payback requirements.
 Disability is defined the same way as for Social Security Disability benefits which is that the disability must prevent any gainful activity (e.g. employment), last longer than 12 months, or be expected to result in death. If someone receives disability benefits from Social Security, they automatically qualify as being disabled for purposes of SSI eligibility.
 An individual can only receive up to $552.00 per month ($829.00 for couples) and no more than $2,000 in countable resources.
 This is commonly referred to as “dual eligibility”. For those who are dual eligible, Medicaid will pay Medicare premiums, co-payments and deductibles within prescribed limits. There are two different programs. First, is Qualified Medicare Beneficiaries (“QMB”). The QMB program pays for the recipients Medicare premiums (Parts A and B), Medicare deductibles and Medicare coinsurance within the prescribed limits. QMB recipients also automatically qualify for extra help with the Medicare Part D prescription drug plan costs. The income and asset caps are higher than the normal SSI/Medicaid qualification limits. Second is Special Low-Income Medicare Beneficiary (“SLMB”). The SLMB program pays for Medicare premiums for Part B Medicare benefits. SLMB recipients automatically qualify for extra help with Medicare Part D prescription drug plan costs. Again, the income and asset caps are higher than the normal SSI/Medicaid qualification limits.
 While most often we deal with someone who has a disability, Social Security Disability also provides death benefits. Additionally, a child who became disabled before age 22 and has remained continuously disabled since age 18 may receive disability benefits based on the work history of a disabled, deceased or retired parent as long as the child is disabled and unmarried.
 SSDI beneficiaries receive Part A Medicare benefits which covers inpatient hospital services, home health and hospice benefits. Part B benefits cover physician’s charges and SSDI beneficiaries may obtain coverage by paying a monthly premium. Part D provides coverage for most prescription drugs, but it is a complicated system with a large co-pay called the donut hole.
 The provisions of the MSP can be found at Section 1862(b) of the Social Security Act. 42 U.S.C. § 1395y(b)(6) (2007).
 Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499 (Dec. 5, 1980).
 42 CFR § 411.20(2) Part 411, Subpart B, (2007).
 The MMSEA created a mandatory insurer reporting requirement which tasks defendants/insurers with reporting settlements involving Medicare beneficiaries to Medicare. The reporting requirement requires settlements of $2,000 or greater to be reported as of 10/1/13. Medicare, Medicaid, and SCHIP Extension Act of 2007 (P.L. 110-173). This Act was passed by the House on December 19, 2007, and by a voice vote in the Senate on December 18, 2007.
 See OMB Website at http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201304&RIN=0938-AR43&utm_source=hs_email&utm_medium=email&utm_content=9802088&_hsenc=p2ANqtz-_euylttJVQH6n2LezrHHgA7PMzVcdcZQAsDlnCG1ebSm8BHxtM5Ar222rNomoh-yQIo5y49aJC-7LqU-KfmwSRwyL2xmKNhbg9vTUcuUjT1mNfif4&_hsmi=9802088
 Medicaid is a needs based public benefit that provides basic health care coverage for those who are financially eligible. The Medicaid program is federally, and state funded but administered on the state level. Services and eligibility requirements vary from state to state. The asset limit is $2,000 for most Medicaid programs but the income limits vary by state.
 SSI or Supplemental Security Income, administered by the Social Security Administration, provides financial assistance to U.S. citizens who are sixty-five or older, blind or disabled. The recipient must also meet the financial eligibility requirements. 42 U.S.C. § 1382 (2007).
 42 U.S.C. § 1396p (d)(4) (2007).
 42 U.S.C. § 1396p (d)(4)(A) (2007).
 42 U.S.C. § 1396p (d)(4)(C) (2007).
 42 U.S.C. § 1396p (2007)
 To be considered disabled for purposes of creating an SNT, the SNT beneficiary must meet the definition of disability for SSDI found at 42 U.S.C. § 1382c. 42 U.S.C. § 1382(c)(a)(3) states that “[A]n individual shall be considered to be disabled for purposes of this title … if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or … last for a continuous period of not less than twelve months (or in the case of a child under the age of 18, if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or … last for a continuous period of not less than 12 months).”
 42 U.S.C. § 1396p (d)(4)(A) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”
42 U.S.C. § 1396p (d)(4)(C) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual who is disabled (as defined in Section 1382(a)(3) of this title) that meets the following conditions: (i) The trust is established and managed by a non-profit association. (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.”
 Third party special needs trusts are creatures of the common law. Federal law does not provide requirements or regulations for these trusts.
 I.R.C. § 104(a)(2) (2007).
 Unlike a structured settlement, simply receiving a lump sum does not provide any spendthrift protection as the money can be dissipated rapidly. Similarly, there is no protection from creditor claims like a structured settlement enjoys.
 A structured settlement is a single premium fixed annuity used to provide future periodic payments to personal physical injury victims. The interest earned is not taxable under Section 104(a)(2) and a series of revenue rulings that provide the basis for structured settlements.
 See I.R.C. § 104(a)(2) (2007). See also Rev. Rul. 79-220 (1979) (holding recipient may exclude the full amount of the single premium annuity payments received as part of a personal injury settlement from gross income under section 104(a)(2) of the code).
 Structured settlements can’t be accelerated, deferred, anticipated or encumbered. The payments are made pursuant to the terms of the contract with the life insurance company. Thus, a personal injury victim is protected from spending the money too quickly. However, there are “factoring” companies that will purchase structured settlement annuities and provide a lump sum payment. These transactions are now regulated by IRC 5891 and many states have enacted provisions to protect structured settlement recipients from unfair transactions. IRC 5891 requires a finding that the sale is in the best interest of the annuitant and requires judicial approval. IRC 5891
 Many states offer protection by statute for annuities. For example, in Florida, the Florida Statutes provide annuities immunity from legal process as long as they are not set up to defraud creditors. See generally § 222.14 Fla. Stat. (2007).
 Sams v. Department of Public Welfare, 2013 Pa. Commw. LEXIS 337 (August 21, 2013).
 Letter from Nancy Veillon, Associate Commissioner for Income Security Programs to Roger M. Bernstein dated January 1, 2006.
Jason D. Lazarus is the managing partner and founder of the Special Needs Law Firm; a Florida law firm that provides legal services related to public benefit preservation, liens and Medicare Secondary Payer compliance. He is also the founder and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, public benefit preservation and complex settlement consulting.