IRC vs. SSA
Every structured settlement and settlement planning professional is presumably well-familiar with the Internal Revenue Code definition of Gross Income in IRC 61 as well as the exclusion for periodic payments in IRC 104(a)(1) and (2), plus many other Internal Revenue Code Sections (130; 468B; 5891) and tax concepts (constructive receipt; economic benefit) that have become the foundation of the United States structured settlement market.
How many of these same professionals, however, are aware that the Social Security Act has its own definition of income, that structured settlement periodic payments have no exclusion under the Social Security income definition and that this lack of an exclusion can result in loss of “means-tested” public benefits for recipients of structured settlements?
For one important example, it is “income” as defined under the Social Security Act, not “income” as defined under the Internal Revenue Code, that creates the “direct funding” issue for the combination of structured settlements and ABLE accounts for which special needs attorney, David Lillesand, has suggested a solution.
Because of the impact of Social Security law on personal injury claimants, every structured settlement and settlement planning professional should have a fundamental understanding of “income” as it is defined under the Social Security Act and how this definition impacts structured settlements.
In general, under Social Security law, “income” is defined as “anything that comes in.” The statutory definition of “income” in the Social Security Act’s SSI provisions includes lots of other things defined as “income for SSI purposes” that are not taxable income under the Internal Revenue Code, such as VA benefits, workers’ compensation benefits and almost always, 100% of SSA disability benefits (unless the person has substantial additional taxable non-SSA income).
Definitions of Income Under Social Security Law
There are three separate definitions of income under Social Security law:
- Social Security Act, Sec. 1612 [42 U.S.C. 1382a] (a) For purposes of this title, income means both earned and unearned income; and
(B) any payments received as an annuity, pension, retirement, or disability benefit, including veterans’ compensation and pensions, workmen’s compensation payments, old-age, survivors, and disability insurance benefits, railroad retirement annuities and pensions, and unemployment insurance benefits;
- Social Security Regulations: 20 CFR Sec. 416.1102. What is income?
Income is anything you receive in cash or in kind that you can use to meet your needs for food and shelter. Sometimes income also includes more or less than you actually receive (see Sec. 416.1110 and Sec. 416.1123(b)). In-kind income is not cash, but is actually food or shelter, or something you can use to get one of these.
- Social Security POMS: SI 00810.005 What is Income?
Income is any item an individual receives in cash or in-kind that can be used to meet his or her need for food or shelter.
Income includes, for purposes of title XVI, the receipt of any item which can be applied, either directly or by sale or conversion, to meet basic needs of food or shelter.
Note: although not specifically identified in these definitions, there are four different types of Social Security Income:
- Earned income – wages;
- Deemed income – income of a parent of a minor or spouse;
- In-kind income – payment by third parties for the SSI claimant’s food and shelter; and
- Unearned income – which presumably includes structured settlements.
OBRA, ABLE and Structured Settlements
Paid directly to individuals, personal injury settlements, whether structured or lump sums, constitute Social Security Income and, therefore, can disqualify the recipient from receiving “means-tested” public benefits which have strict income and resource eligibility requirements.
Congress created special needs trusts (SNTs) as part of the Omnibus Reconciliation Budget Act (OBRA) of 1993 as a safe harbor to help individuals, including personal injury award recipients. SNTs can also fund ABLE accounts subject to the maximum annual allowable contribution (currently $15,000).
Structured settlements, however, are not specifically mentioned in the Social Security Act, OBRA, the ABLE Act or the related regulations or POMS. This absence of legal authority and guidance under Social Security law not only creates interpretive problems for structured settlements. Arguably, it has also restricted structured settlement growth.
Responding to letters written on behalf of the National Structured Settlement Trade Association (NSSTA), Associate Social Security Administration (SSA) Administrator Nancy Veillon provided limited guidance in 2006 when she wrote that structured settlement annuity payments irrevocably assigned to a SNT do not result in Social Security income or resources to the trust beneficiary so long as the beneficiary has no right to anticipate, sell or transfer the annuity payments.
No such clarification has been provided for ABLE accounts other than statements from various SSA and state Medicaid officials: 1) that direct payments to ABLE accounts constitute Social Security Income and therefore potentially disqualify the ABLE beneficiary from “means-tested” public benefits; and 2) structured settlement payments can be made to an SNT because, unlike an ABLE account, the SNT is not “owned” by the SSI claimant.
A suggested optimum solution, specific to structured settlements and ABLE accounts, would be a federal statutory change that all structured settlement payments be designated as “exempt resources” for SSI eligibility purposes just as they are exempt from federal income tax.
An alternative, and more comprehensive solution, might be to seek an amendment to POMS SI 00830.099 which provides a list of 59 “unearned income exclusions” – to include structured settlement payments as an additional exclusion. Whether the SSA would agree, however, is questionable.
In the short term, for purposes of direct funding ABLE accounts, structured settlement and settlement planning professionals will hopefully begin discussing David Lillesand’s proposed solution with special needs attorneys, plaintiff attorneys and their clients. The purpose of this article about “Social Security Income” is not only to help educate structured settlement and settlement planning professional for such conversations but also to encourage NSSTA to seek a more permanent legislative solution for “direct funding” of ABLE accounts.
TAX & LEGAL DISCLOSURE: Information contained herein is not intended to be case specific tax or legal advice nor is it intended or written to be used, and cannot be used, for the purpose of avoiding any tax or social security penalties. You should seek advice based on your particular circumstances from an independent tax or legal advisor if you have tax or legal related questions.