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By Guest Author B. Joshua Pettingill, MBA, MS, MSCC

Funding a WCMSA with a structured settlement annuity has numerous advantages versus a lump sum funding.

The Centers for Medicare and Medicaid Services (CMS) allows for a Workers’ Compensation Medicare Set-Aside (WCMSA) to be funded either with a lump sum or a structured settlement.  With a lump sum funded MSA, the entire amount must be spent down before Medicare will start to pay again. In theory, this spend down will take the entire lifetime of the claimant. Whereas, with an annuity funded WCMSA, it functions like an annual insurance deductible. Each year a payment is made from the structured settlement annuity into the set-aside; that payment, plus any carryover from prior years, must be spent down before Medicare will pay for accident related services in any given year.

The greatest advantage to funding the WCMSA with a structured settlement is that it reduces the amount or cost basis that must be set aside.  On average, the cost savings can be 40%-60% depending on current macroeconomic conditions as well as other factors. For example, a “rated age” can be used as evidence of reduced life expectancy which further lowers the present value cost to fund the set-aside.  By definition, a rated age is a substandard life expectancy based on the claimant’s medical conditions. If the annuity company believes the claimant may pass away prematurely due to underlying medical issues, then they may be willing to pay more money on life contingent benefits. Subsequently, the cost to fund those benefits will go down when there is a rated age along with the total amount needing to be set aside.

With a structured settlement funded MSA, the claimant can exhaust the money in the set-aside account at any point in time during the year and Medicare will start to pay for all accident related expenses. This is called “temporary exhaustion”.  By funding the MSA this way, there are more dollars freed up that can be used for non-Medicare expenses or replacement of indemnity benefits. Additionally, temporary exhaustion obligates Medicare potentially to pay something towards injury related care each year.  Because structured settlement annuities are tax-free and reduce the amount of the set-aside substantially, they should be considered in nearly every set aside arrangement.[1]

[1] Any MSA amount greater than $25,000 should be considered for structured settlement funding due to the cost savings.

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