Employment related damages are almost always taxable, whether they are wages, personal injuries or lost benefits. Utilizing a structured settlement can greatly reduce the amount of taxes a plaintiff will owe on an employment settlement. One often overlooked aspect of the taxation of employment damages is the increased tax liability of the plaintiff. The seminal case on this issue is Eshelman v. Agere Systems Inc., 3d Cir.,No. 05-4895,1/30/09.
In Eshelman, the U.S. Court of Appeals for the Third Circuit held that a supervisor who was terminated in a reduction-in-force after experiencing memory loss issues following chemotherapy for breast cancer was awarded an additional $6,893 to offset the negative tax consequences of her taxable award of $206,893. The Court of Appeals held that a district court may award a prevailing employee an additional sum of money to compensate for the increased tax burden a taxable award may create. The Court stated that “An additional award to cover the tax consequences of a lump-sum award is necessary and appropriate, in certain circumstances, to make the plaintiff whole.”
You are already aware that awards and settlements that are taxable not only waste much of the award to taxes, but can lift a plaintiff into a higher tax bracket for that year. Many types of awards and settlements are taxable, not just those that are employment related. Claims or awards for punitive damages, discrimination, non-physical injuries, emotional distress, defamation and interest are generally taxable.
This case is a landmark decision for the growing use of Non-Qualified Structured Settlements. In 2008, our parent company, IFS, obtained Private Letter Ruling 200836019, establishing the use of Non-Qualified Structured Settlements on taxable settlements as a valuable settlement tool for plaintiffs. This tool provides an opportunity for the plaintiff to receive guaranteed payments and tax deferral, allowing them to move forward with their lives once their employment claim is settled.
Attorneys should be mindful of the tax impact of a lump sum award for their clients and should consider using a Non-Qualified Structured Settlement through Millennium Settlements to avoid suffering an adverse tax consequence. A structured settlement using a Non-Qualified Structured Settlement could alleviate such a possibility while providing plaintiffs with a more appropriate settlement (1).
The AVITAS Division of Millennium Settlements is uniquely qualified to handle these types of settlements and is able to offer an expanded life and annuity market for both the plaintiff and attorney in this area.
(1) This may not be relied upon as legal or tax advice, nor does this constitute legal advice. All legal and tax questions regarding a settlement should be referred to your legal counsel.