I. Introduction: From System Shifts to Strategic Opportunity
This article is the fifth installment in our six-part series on how structured settlements interact with public benefit planning.
Article 1 and Article 2 explored system-wide shifts; the One Big Beautiful Bill’s (OBBB) expansion of state authority over Medicaid and the Social Security Administration’s (SSA’s) 2025 reforms reshaping Social Security Income (SSI) and Social Security Disability Income (SSDI) eligibility.
Article 3 then focused more on Medicaid, explaining how the absence of formal statutory guidance, compounded by OBBB’s decentralization and the elimination of agency deference due to the U.S. Supreme Court’s Loper Bright decision in 2024, increases the risk of suboptimal coordination between tax-based settlement planning and needs-based Medicaid planning.
Article 4 traced the historical evolution of structured settlements: born as tax-focused, claims settlement instruments, increasingly interacting over time with disability and Medicaid planning through informal guidance, yet still lacking full statutory clarity and framework integration.
This article builds on the foundation of the prior four by examining how structured settlements are shaped by two federal frameworks that remain unsettled. The first is the Social Security statute, which defines income for SSI purposes broadly and contains no exclusion for structured settlement payments. The second is the Deficit Reduction Act of 2005 (DRA), which imposes strict requirements on annuities for Medicaid eligibility but never clarified whether, or how, those requirements apply to structured settlement annuities.
Because neither SSI nor the DRA expressly addresses structured settlements, practitioners have had to rely on general regulatory principles, staff correspondence, and internal agency guidance. For decades, this framework has provided enough reassurance to support settlement planning. But today, the combination of expanded state discretion under the OBBB, diminished federal deference after Loper Bright, and increasingly complex structured settlement products has made outcomes less predictable. The need for clear, binding federal standards has never been greater.
The challenges can be summarized along three dimensions:
For claimants – the need for predictable outcomes. Individuals who depend on means-tested benefits, especially SSI and Medicaid, must be able to rely on structured settlements to preserve eligibility.
For practitioners and courts – the difficulty of delivering such predictable outcomes. Without clear statutory or regulatory rules, attorneys, settlement consultants, trustees, state agencies and courts increasingly need to piece together indirect guidance, which increases complexity and administrative burden.
For the structured settlement profession – limits on broader adoption and innovation. Ambiguity can be expected to complicate and potentially discourage the use of structured settlements in benefit-sensitive cases, slowing market growth and impeding the development of new product designs.
At the same time, these challenges also identify a strategic opportunity. The structured settlement field has already moved beyond its original tax and claims focus toward a more claimant-centered settlement planning profession. Increasingly, structured settlement annuities are being coordinated with benefit-protection tools such as special needs trusts (SNTs) and pooled trusts in light of Medicaid eligibility considerations – relying on informal Social Security Administration (SSA) communications and one SSA POMS that does not mention structured settlements in doing so.
In contrast, related questions have also arisen with ABLE accounts, where the SSA and some state Medicaid agencies have ruled that direct structured settlement payments into ABLE accounts should be treated as income for SSI eligibility purposes. This disparate treatment for ABLE accounts compared to SNTs and pooled trusts is a clear indicator of the problems and potential problems highlighted by this article.
The transition of structured settlement to settlement planning should not be just about protecting “government benefits” in the abstract. Rather, it must ensure that structured settlements function reliably within the SSI and Medicaid systems on which many claimants depend.
II. Gaps Between Structured Settlements and SSI/Medicaid Eligibility Rules
Most compensatory damages for personal physical injuries or sickness are excluded from gross income under the Internal Revenue Code’s §104(a)(2). For simplicity, we sometimes refer to these damages as §104(a)(2) recoveries. Congress adopted this exclusion to ensure that personal physical injury recoveries serve their restorative purpose rather than being diminished by taxation.
The SSI statute, by contrast, defines income broadly and contains a closed list of 26 exclusions. None of these exclusions extends to §104(a)(2) recoveries or to the structured settlement payments derived from them. The statute also addresses “resources,” which, together with income, form the basis for SSI and Medicaid eligibility determinations.
This divergence reflects more than a technical inconsistency. It highlights a deeper policy misalignment: tax law recognizes the restorative purpose of injury recoveries, while “means-tested” benefits statutory and regulatory law has never been updated to account specifically for structured settlements. For claimants who rely on both Medicaid and their structured settlements, the consequences can be severe, eligibility for essential benefits may hinge on how state agencies or courts interpret rules never designed to incorporate structured settlements, often applied by staff unfamiliar with how these different but interrelated programs function.
For many years, practitioners have managed this tension with general SSI regulations, informal agency guidance, and planning techniques such as SNTs and pooled trusts. Structured settlements have been used since the 1970s, but their integration with SNTs and pooled trusts dates to OBRA 1993 and was reinforced by the Veillon letters and one relevant POMS provision.
Reliance on this informal framework, however, has become less certain. The combination of broader use of structured settlements, increasingly complex annuity designs, and expanding state discretion has made outcomes less predictable. What once provided workable reassurance now risks producing inconsistent determinations across states.
Each of the following five gaps illustrates how statutory silence or ambiguity affects structured settlements in practice — and highlights opportunities to strengthen claimant protections, ease administration, and build a more durable federal framework.
Gap #1: No Statutory Exclusion for Structured Settlements Under SSI
The SSI statute (42 U.S.C. § 1382a(a)) defines income broadly: “Income means both earned income and unearned income; and unearned income means all other income, including support and maintenance furnished in cash or in kind.”
To balance that definition’s breadth, Congress created a closed list of 26 exclusions in § 1382a(b) — covering items such as food stamps, home energy assistance, and disaster relief payments, among others. Yet §104(a)(2) recoveries and the structured settlement payments derived from them are absent from that list.
This omission has long created uncertainty for structured settlements. Without an explicit exclusion, every structured settlement payment must be evaluated under general SSI rules.
That evaluation occurs at multiple levels:
SSA, which defines income and issues POMS instructions to its field staff;
CMS, which regulates Medicaid nationally but has a reduced role following OBBB’s decentralization; and
State Medicaid agencies, which apply SSI methodologies with varying degrees of discretion and expertise.
The purpose of these evaluations is to determine eligibility for SSI cash benefits and, through SSI’s cascading methodology, for Medicaid coverage. For claimants who rely on both their structured settlement and public benefits, outcomes may hinge on how an individual caseworker or state agency interprets rules never designed with structured settlements in mind.
Practitioners have often sought reassurance by directing payments into SNTs or pooled trusts. While those vehicles are recognized under separate statutory authority, the SSI statute itself makes no mention of structured settlement payments. As a result, their treatment remains dependent on case-by-case determinations. The inconsistent consequences this creates are discussed further in Gap #4.
Gap #2: SSI Income Rules Cascade into Medicaid
Medicaid eligibility is tied directly to SSI’s income and resource rules, yet those rules were never written with structured settlements in mind. Because Medicaid programs borrow SSI methodologies, any uncertainty in SSI treatment cascades into Medicaid determinations, multiplying the risk of inconsistent results.
In states that follow SSI rules directly, SSI determinations control Medicaid eligibility. Even in “209(b) states,” which impose stricter financial criteria, SSI methodologies remain the starting point.
For structured settlements, this linkage creates distinctive challenges. Unlike wages or pensions, structured settlement payments are generally owned by assignment companies, cannot be accelerated at will, and are often integrated with benefit-preservation vehicles such as SNTs or pooled trusts. Yet SSI has never squarely addressed these features.
As a result, every SSI classification ripples into Medicaid:
When SSI rules treat structured settlement payments as non-countable, for example, when payments are irrevocably assigned into a special needs trust, state Medicaid agencies generally follow.
When SSI rules treat payments as income, as occurs with direct payments into ABLE accounts, Medicaid eligibility can be jeopardized, regardless of the claimant’s long-term needs or the restorative intent of the recovery.
For claimants, the stakes are fundamental. Because Medicaid is the primary payer of long-term care and essential health services, a single SSI determination can decide not only cash benefits but also ongoing medical coverage. For practitioners, the cascade compounds complexity: they must anticipate both the federal SSI rules and how state Medicaid agencies, operating with varying discretion and expertise, will apply those rules in practice.
What should serve as a uniform federal baseline instead operates increasingly as a patchwork of uncertain possibilities. Structured settlements, designed to provide secure long-term support, remain vulnerable to uneven outcomes simply because SSI and Medicaid have never directly addressed them.
Gap #3: Regulations Provide Limited Guidance but No Structured Settlement-Specific Authority
This gap has two dimensions. First, no SSI or Medicaid regulation specifically addresses structured settlements. Second, in the absence of such authority, agencies and practitioners must determine which general regulations might apply. In practice, that gap has meant relying on concepts such as “availability” and “constructive receipt”, rules designed for other contexts that have been adapted, sometimes inconsistently, to structured settlements.
For structured settlements, this has produced workable but indirect and sometimes inconsistent outcomes. Assignment-company–owned annuities are generally not treated as “resources” under SSI and Medicaid, and future periodic payments are generally not considered “constructively received” for purposes of Social Security income rules.
This treatment reflects the product’s design: claimants cannot accelerate or transfer future payments without a court order, and ownership remains with the assignment company. Yet because the SSI and Medicaid regulations never explicitly mention structured settlements, their application in this context remains uncertain.
This uncertainty has occasionally appeared in practice. In the past, some state Medicaid agencies or caseworkers, unfamiliar with structured settlements, have pointed to factoring transactions as evidence that future payments were “available”, even though legal ownership remained with the assignment company.
Others have questioned whether directing payments into a SNT gave the claimant enough control to trigger constructive receipt, depending on how the assignment was structured. Such issues may eventually be resolved in individual cases, but only after added explanation, delay, or dispute.
The risks are greater in today’s environment. State Medicaid agencies, operating with expanded discretion under OBBB and tighter budgets, must apply general SSI rules to increasingly complex settlement designs. Without explicit authority, front-line staff are left to interpret concepts never intended for structured settlements, increasing the likelihood of inconsistent treatment.
For practitioners, the burden is cumulative: each case may now require re-educating agencies or courts on how structured settlements fit within general regulatory principles. For claimants, the result could be greater uncertainty at the very point when stability is most needed.
Gap #4: Inconsistent Treatment of Structured Settlement Payments into SNTs, Pooled Trusts and ABLE Accounts
Congress authorized SNTs, pooled trusts, and later ABLE accounts to give disabled individuals tools to preserve eligibility for certain means-tested benefits while covering supplemental expenses not met by public programs. Depending on their structure, SNTs and pooled trusts can preserve eligibility for programs such as SSI and Medicaid, but they do not protect against all benefit eligibility tests, particularly those with stricter income or resource standards.
Structured settlements have long been directed into SNTs and pooled trusts, while ABLE accounts have posed challenges from the start. Across all three vehicles, however, no binding federal rule explicitly confirms that structured settlement payments are entitled to protective treatment once routed into them.
The 2006 Veillon letters, reviewed in Article 4, confirmed two points for SNTs: structured settlement annuity payments irrevocably assigned into a qualifying SNT are not counted as income to the beneficiary, and the trust’s right to receive future payments is not treated as a resource. This treatment applies even if payments occur after age 65, so long as the irrevocable assignment happened beforehand. But the Veillon letters applied only to SNTs and carried no binding effect. They did not address pooled trusts or ABLE accounts.
The POMS offer indirect support. For example, SI 01120.200(G)(1)(d) provides that if funds are transferred to a trust by court order and the beneficiary cannot revoke or direct their use, those funds are not income. Practitioners have applied this by analogy to structured settlement payments into SNTs and pooled trusts. But again, the POMS never mentions structured settlements explicitly.
The inconsistency is most visible with ABLE accounts. SSA has ruled, and some states have followed, that direct structured settlement payments into an ABLE account are treated as income for SSI purposes, even though such payments remain excluded from gross income under IRC §104(a)(2). This treatment can eliminate SSI eligibility for that month and, in SSI states, jeopardize Medicaid eligibility. It directly undermines ABLE’s statutory purpose of encouraging savings without loss of benefits and highlights the conflict between tax law and SSI administration.
The result is a patchwork. Federal intent regarding structured settlement payments into these vehicles has never been clearly articulated, leaving state agencies to reach divergent conclusions. These inconsistencies can delay determinations, increase costs, and complicate coordination among practitioners, trustees, and administrators.
A structured settlement designed to provide lifetime stability can instead jeopardize access to essential benefits. As structured settlements expand into more complex products within a more diverse regulatory environment, the likelihood of unpredictable outcomes will only increase absent clearer federal guidance.
Gap #5: No Explicit Treatment of Structured Settlement Annuities in the DRA
The Deficit Reduction Act of 2005 (DRA) was enacted to curb the use of retail annuities by Medicaid applicants seeking to shelter assets. To achieve this result, the statute imposed disclosure obligations and substantive requirements, including actuarial soundness, equal payments, and naming the state as remainder beneficiary, on annuities “purchased by or on behalf of” an applicant or spouse. But Congress never defined that phrase or explained whether the requirements were meant to reach structured settlement annuities, which are purchased and owned by assignment companies, not by claimants.
In practice, the structured settlement profession has generally treated assignment-owned annuities as outside the DRA’s substantive restrictions. Shortly after enactment, CMS issued a 2006 memorandum to state Medicaid directors distinguishing annuities purchased or owned by applicants from those purchased and owned by third parties. That guidance reinforced the prevailing view that qualified-assignment structured settlements are not subject to the DRA’s substantive limits. Yet the memo never mentioned structured settlements explicitly.
Disclosure, however, remains unavoidable even for structured settlement annuities payable into a SNT or pooled trust. Because the claimant is typically the measuring life, most states treat that status as a disclosable interest. Disclosure serves its intended purpose of transparency. The difficulty arises with what follows: once disclosed, state agencies must decide whether to apply the DRA’s substantive restrictions, and the statute provides no clear direction.
As a result, familiar features of structured settlements have sometimes been second-guessed under retail annuity standards:
Lifetime payments challenged as “actuarially unsound.”
Indexed or step-up payments questioned under the equal-payment rule.
Balloon or deferred lump sums treated as inconsistent with DRA requirements.
For claimants, this creates needless uncertainty: a settlement designed to provide secure, long-term support may be undermined by rules never intended for structured settlements. For practitioners, the uncertainty can complicate planning, force additional advocacy, and delay benefit determinations. For the industry, going forward, the lack of explicit authority may discourage broader use of structured settlements in cases where Medicaid eligibility is a central concern.
Clarification is needed: assignment-owned structured settlement annuities should be recognized as outside the DRA’s substantive restrictions while remaining subject to disclosure. That distinction would provide agencies with a consistent national standard, reduce disputes, and allow structured settlements to serve their intended role of delivering lifetime security.
III. Conclusion – Why Federal Action is Needed
Structured settlements remain one of the most effective ways to provide long-term financial security for claimants who also depend on public benefits. Yet their treatment under SSI and the DRA remains unresolved, leaving claimants, practitioners, and state agencies to rely on indirect and inconsistent authority.
Under SSI, two forms of clarification are needed. First, Congress should amend 42 U.S.C. § 1382a(b) to add an income exclusion for structured settlement payments directed into SNTs, pooled trusts, and ABLE accounts. Codification would replace reliance on indirect inclusion principles, reduce case-by-case disputes, and ensure consistent national treatment. Second, federal clarification confirming that structured settlement payments receive uniform treatment across these vehicles would eliminate today’s patchwork guidance, provide predictable protection of SSI and Medicaid eligibility, and lower administrative burdens.
Under the DRA, the statutory language is ambiguous, not silent. Clarification from CMS, specifically affirming that assignment-owned structured settlements are outside the DRA’s substantive restrictions while remaining subject to disclosure, would resolve decades of uncertainty and provide agencies with a consistent national standard.
In today’s environment of expanded state discretion, reduced deference to agency interpretation, and increasingly complex settlement designs, these clarifications are more than technical. They are necessary to protect claimants’ access to essential benefits, reduce administrative burden, and allow structured settlements to achieve their full potential as reliable instruments of modern settlement planning.
The next article in this series (Article 6) will take up this challenge directly, outlining specific statutory and administrative proposals and the strategies needed to advance them, so that structured settlements can be integrated into a durable federal framework for SSI and Medicaid.
Written By: Patrick Hindert and George Luecke
Independent Life Insurance Company does not provide tax, legal, or financial advice. The information contained herein is for general informational and educational purposes only and is not intended to serve as a substitute for personalized advice from qualified professionals.
