Reduce Taxes and Save for Retirement with Attorney Fee Deferrals

A few months ago, a trial attorney in New York City had just settled a big case. He was like a lot of people reading this article; well-respected, successful, hardworking. But while he was excited about the result, he was frustrated with the massive amount of taxes he would have to pay. So, he decided to consider deferring his fee.

He learned that deferring fees is similar to the deferred compensation programs offered to top executives at Fortune 500 companies. Just like in a 401(k), you don’t pay taxes on the fee until you receive it. In the meantime, the money earns the returns of various investments that you or your financial advisor chooses – stocks, bonds, real estate, etc. But unlike a 401(k), there is no limit on how much you can defer.

This can significantly reduce your tax burden in two ways. First, as with a 401(k), when you pay taxes later, your money grows faster. Second, by spreading the income out over time, you can end up in a lower tax bracket.

In addition to reducing his tax burden, this attorney learned that deferring his fee enabled him to better meet his cash-flow needs. While he wasn’t allowed to accelerate his scheduled distribution payments, he could choose to re-defer his payments within the rules of tax-deferred compensation. In addition, fee deferrals can be used as “golden handcuffs” to retain key associates, whereby if they leave too soon their deferred bonus comes back to the firm.

Ultimately this attorney did his due diligence and decided to defer a $1,000,000 of his fee. He ultimately chose to defer to significantly reduce his tax burden and better control his cash-flow needs.

Key Takeaways

Attorneys can defer compensation like Fortune 500 executives do, to reduce their tax burdens
Tie your fee to the returns of investments that you select – stocks, bonds, real estate, etc.
Exercise better control over the timing of payments, and the resulting taxation.
Use “golden handcuffs” to retain key associates, whereby if they leave too soon their deferred bonus comes back to the firm.

This attorney is one of the hundreds that have deferred fees in recent years. In fact, the concept has been around for decades. A lawyer’s right to defer fees was established by the U.S. Tax Court in Childs v. Commissioner (1994) and affirmed two years later by the 11th Circuit U.S. Federal Appeals Court. The IRS also cited the Childs case favorably in Private Letter Ruling 200836019.

From a legal perspective, fee deferrals are materially subject to the same body of tax rules that govern Nonqualified Deferred Compensation (NQDC), namely the constructive receipt and economic benefit doctrines. As mentioned earlier, Fortune 500 companies have been using NQDC for many decades to attract and retain their top executives.

So, what are the steps to defer? The steps are quite simple – and similar to a traditional fee structure. The attorney must enter into a Deferred Payment Agreement before the final settlement (i.e. before signing the release). Each partner decides how much to defer and for how long. This is the most critical part of the process.

It is also recommended that deferral language is added to the fee agreement with your client providing the client’s consent to fee deferrals and that the defendant is instructed to wire the deferred amount directly to the trustee and custodian. Payment instructions are often included in the release agreements, as well. In some cases, settlement monies are first paid into a Qualified Settlement Fund (QSF) and form there wired to the trustee and custodian. A QSF is basically an escrow account or trust that provides the necessary time for proper settlement planning and liens negotiation. In essence, it gives both the clients and the attorneys more time to figure out what to do with the settlement monies without the involvement of the defendant.

Fee deferrals can offer a range of benefits, from reducing an attorney’s tax burden to increasing their access to cash and helping them retain key associates. Deferring fees is not for everyone, however, particularly if an attorney needs the money now. And if an attorney does want to defer, selecting the right provider is critical to the safety of the deferral.

Liability Medicare Set-Asides (LMSAs): Is It Time to Start Worrying?

B. Josh Pettingill

For over a decade, there has been episodic activity from Centers for Medicare and Medicaid Services (CMS) on Liability Medicare Set-Asides (LMSAs), including but not limited to, policy memorandums, Medicare Learning Network announcements, a notice of proposed rulemaking with subsequent withdrawal, an advanced notice of a notice of proposed rulemaking as well as the hiring of a new review contactor. As of the date of this update, we are still without formal policies for how to properly consider Medicare’s future interests in liability claims. But is it time for trial attorneys to start worrying? This brief post will provide some suggestions to be well-prepared for formal guidelines on LMSAs.

Key Takeaways

Medicare Secondary Payor (MSP) compliance is serious business and should not be ignored.
Plaintiff attorneys must establish an internal screening process for their liability cases involving Medicare beneficiaries.
Plaintiff attorneys must be vigilant about MSP compliance from the start of the case.
MSP compliance starts at the intake of the case.

If your firm does not have an internal process for auditing Medicare-eligible plaintiffs when you undertake representation, then you probably should be worried. If you are on the sidelines waiting around for formal guidelines to be implemented before you start being proactive on the issue, you are doing a disservice to yourself and your clients, as well as putting yourself at risk of being made an example by CMS for non-compliance with the MSP statute. This is so because the Department of Justice has already sued two different personal injury firms over non-compliance with the MSP related to conditional payments (see previous post HERE). You could also be setting yourself up for a legal malpractice claim for failure to educate your clients on the need to properly consider Medicare’s future interests. The good news is that it is not too late; the below can help get you started on establishing a framework within your firm for handling cases with Medicare-eligible plaintiffs.

Identify Medicare beneficiaries as soon as possible so you can stay ahead of the MSP compliance issues.
Follow CMS guidelines for reporting and resolving conditional payments.
Investigate whether the client has ever received benefits under a Medicare Advantage plan (MAO – Part C). If yes, make sure to resolve the lien as it can be “hidden” (see previous post HERE)
Audit your files at the beginning of the intake process and group the cases into categories based on the injuries, potential future care, available coverage, and potential settlement value to determine which files might be candidates for formal MSA screening.
Identify all forms of health insurance coverage and disability benefits upon intake of the case so you know what liens have to be resolved as well as whether Medicare’s future interests need to be considered.
Determine at the onset if future medicals are claimed which will be a key determinant in whether a Medicare Set-Aside should be considered.
Update your retainer agreement language to allow you to engage your own Medicare experts as a case cost to the client.

From what we have observed firsthand, Medicare is not regularly denying claims on the basis that injury-related care should be paid for out of an MSA account (read more HERE); however, as recently as last month, CMS indicated that change is imminent as it relates to liability claims[1]. Whether or not CMS ever provides formal guidelines on liability MSAs, trial lawyers must establish their own processes for screening and auditing liability case files. For more information about liability MSAs visit us at https://partnerwithsynergy.com/total-medicare-compliance/.

[1] This was mentioned at the National Alliance of MSA Professionals (NAMSAP) annual conference in Baltimore, Maryland.

Medicare Set-Aside Self-Administration: What is new?

B. Josh Pettingill

Last week, the Centers for Medicare and Medicaid Services (CMS) issued the latest edition of their Medicare Set-Aside (MSA) self-administration toolkit. This toolkit is intended to serve as a guidebook or roadmap for how to properly administer a Workers’ Compensation Medicare Set-Aside (WCMSA) account. The statistics show that 99% of claimants elect to self-administer their MSA account. The problem with that is 98% of them are probably doing it the wrong way. For a summary of best practices for administration of the WCMSA, you can view one of our older posts here which goes into greater detail. To download the latest edition of the toolkit, please click here.

One key addition to the toolkit is that claimants can now submit their annual attestation forms through the CMS portal. The attestation is the yearly accounting CMS wants to see on how the funds were spent. In years past, these forms had to be sent by snail mail. Unfortunately, most claimants who self-administer have likely never completed the attestation. The electronic option makes it a lot easier to do that now. As a follow-up, CMS will be hosting two separate webinars to highlight this latest feature. For more information, or to register for the webinar, you can visit the CMS website.

An alternative to MSA self-administration is professional administration. Pooled Trust Services is the only group offering MSA administration through a trust solution. With both a professional administrator and corporate trustee, there is no greater protection for the claimant. That way, everyone can have the peace of mind that the claimant’s Medicare benefits will never be disrupted. At minimum, best practices for attorneys handling workers’ compensation claims involving a Medicare Set-Aside account would be to include a hard copy of the toolkit or a link with the electronic version for reference. To learn more about professional administration, visit our website.

Medicare Compliance, or Else Redux: A Third Law Firm Settles with the DOJ for Failing to be MSP Compliant

By Jason D. Lazarus, J.D., LL.M., MSCC

The government takes its reimbursement rights seriously and is willing to pursue trial lawyers who ignore Medicare’s interest. On November 4^th, 2019, The United States Attorney for the District of Maryland announced that a Baltimore-based law firm paid the United States $91,406.98 to resolve allegations that it failed to pay back Medicare for conditional payments that had been paid on behalf of firm clients. The press release, while scant on details, seems to indicate that the firm had entered into a joint-representation agreement with co-counsel who in turn did not reimburse Medicare at settlement. According to U.S. Attorney Robert K. Hur, “Plaintiffs’ attorneys cannot refer a case to or enter into a joint representation agreement with co-counsel and simply wash their hands clean of their obligations to reimburse Medicare for its conditional payments.” He went on to say, “We intend to hold attorneys accountable for failing to make good on their obligations to repay Medicare for its conditional payments, regardless of whether they were the ones primarily handling the litigation for the plaintiff.”

Similarly, earlier this year in March, the United States Attorney for the District of Maryland announced that a Maryland personal injury law firm had agreed to pay the United States $250,000 to settle claims that it did not reimburse Medicare for payments made on behalf of a firm client. As part of the settlement, the firm “also agreed to (1) designate a person at the firm responsible for paying Medicare secondary payer debts; (2) train the designated employee to ensure that the firm pays these debts on a timely basis; and (3) review any outstanding debts with the designated employee at least every six months to ensure compliance.”

This is the third such settlement in the last two years. Back in June of 2018, the U.S. Department of Justice announced a settlement with a Philadelphia personal injury law firm involving failure to reimburse Medicare. The firm agreed to start a “compliance program” and the DOJ stated that this “settlement agreement should remind personal injury lawyers and others of their obligation to reimburse Medicare for conditional payments after receiving settlement or judgment proceeds for their clients.” The U.S. Attorney’s office also stated, “When an attorney fails to reimburse Medicare, the United States can recover from the attorney—even if the attorney already transmitted the proceeds to the client. Congress enacted these rules to ensure timely repayment from responsible parties, and we intend to hold attorneys accountable for failing to make good on their obligations.”

Consequently, in today’s complicated regulatory landscape, a comprehensive plan for Medicare compliance has become vitally important to personal injury practices. Lawyers assisting Medicare beneficiaries are personally exposed to damages and malpractice risks daily when they handle or resolve cases for Medicare beneficiaries. Synergy can be your resource for total Medicare Compliance. For a deeper dive, you can view the following 15-minute video presentation on this subject at: https://youtu.be/2EH7QWjj2zw

Do You Want to Retire With a Six-Figure Pension?

According to Yahoo Finance, in 1998 59% of Fortune 500 companies offered traditionally defined benefit pension plans to new hires. However, by 2017 Yahoo reported that only 16% of those same companies offered a traditional defined benefit pension plan. Defined Benefits Pensions typically pay a retiring employee a percentage of their average earnings for the remainder of their life based on the years with a company.

However, Trial Lawyers are in a unique position to create their own “pension” backed by some of the highest-rated life insurance companies in the world. A lawyer can do so by electing to enter into an attorney fee structure. In 1996, the 11^th Circuit case Childs v. Commissioner was decided which rejected the Internal Revenue Service’s attack on attorney fee structure annuities. Since then, the IRS hasn’t again challenged a lawyer’s ability to invest their fees on a pre-tax and tax-deferred basis. As a result of Childs, like your 401(k) or IRA, an attorney can enter into a fee deferral program and defer the taxation until the funds are withdrawn. The real benefit is there is NO LIMIT on how much you can defer in a calendar year. You can defer $10,000 or $10,000,000 on the same pre-tax basis. So it is really a Super IRA.

Structured attorney fees work very much like a non-qualified deferred compensation plan. The taxes that would be otherwise paid on the fee earned at the time the case is settled are deferred, and that money grows without tax on the growth. When distributions are made, the entire amount distributed during a year is taxable for that year. Based upon a taxpayer’s tax bracket, there may be some distinct tax advantages to entering into this type of arrangement as opposed to being taxed on the entire fee in the year it was earned and investing it after tax.

Time is of the Essence

The most important factor in your retirement planning is time. The interest rate you earn on the funds is helpful but starting early is more valuable. At a recent state trial lawyer convention, they were discussing membership and the host said 8% of their membership responded to a survey that they would retire in the next 5 years. That sparked our interest. We went to the Department of Labor and Statistics to see the workforce demographics reported in 2018 and extrapolated some data to make assumptions about the Trial Lawyer community.

For demographic purposes, you can make the estimation that about 90% of all trial lawyers are between 24 and 65 years of age.

Ages 25 to 34: 23%

Ages 35 to 44: 25%

Ages 45 to 54: 25%

Ages 55 to 64: 19%

If we assume that most attorneys will receive $30,000 from Social Security at age 65, you will need to create another $70,000 to reach six figures. Here is the cost to defer today and set up an annual payment of $70,000 a year at age 65 guaranteed for the remainder of your life.

Age: 33 Cost: $479,889.20

Age: 43 Cost: $659,381.80

Age: 53 Cost: $908,812.80

If you placed the amount above in a traditional attorney fee structure, you would receive $70,000 annually each year for the remainder of your life starting at age 65. For female attorneys, the costs would be slightly higher because females tend to live longer; however, the percentages are the same. If you wait until 43, you will need to invest 37% more to achieve the same payments at retirement age. If you wait until 53, you will need to invest 89% more to achieve the same result.

As you have read in our other Attorney Fee blog posts, there are many ways to defer your fees. This link describes some of the pros and cons of the various options you have available to you.

It is important to understand that regardless of the rate, the longer you wait to start the more you will have to invest to achieve the same benefits. The amount of money you need to invest to achieve your desired goal will always increase. Every delay in starting costs you more money.

The risk you take with the deferrals is very specific to your own personal market experience and tolerance.

Defer Fees on Your Terms

You can start to build your plan with $25,000 or $50,000. You can do it one time or one hundred times. You can defer one year and not the next. One partner in the firm can defer and the other can take their fee now. There really is no limitation to how you use deferral program. The options are endless.

Warren Buffet said, “The rich invest in time. The poor invest in money.” The most important thing to do is start now. Your age does not matter because every day you wait will cost you more for the same plan. The more time you have the less money you need to invest!

Settlement Planning Issues for Personal Injury Victims

By Jason D. Lazarus

Introduction

Catastrophically injured individuals have unique needs when it comes time to settle their cases. A one-size-fits-all approach does not work given the complexities that are faced today upon resolution of a personal injury lawsuit. Consideration of how healthcare will be obtained have become much more complicated with the Affordable Care Act (ACA). An analysis is needed, in many cases, of whether to keep public benefits, such as Medicaid, in place for healthcare or go into the exchanges. In some cases, future Medicare eligibility may be jeopardized if proper planning is not done. Moreover, the question of how best to manage the net proceeds presents an important question that cannot be overlooked. Should the settlement be structured? Should a trust be utilized? Are there public benefit preservation issues that will determine what type of trust needs to be created?

Frequently these questions are overlooked because the defendant comes to mediation with a “structured settlement broker” who offers the solution to all of these issues, a structured settlement annuity. Structured settlement annuities are a great planning device and certainly have their place in the resolution of a personal injury settlement. The problem becomes when it is touted as the solution to every issue and it is mandated by an insurer through their own captive life insurance company. The purpose of this article is to educate attorneys about the many issues that should be considered before accepting a settlement plan and an argument about why it is imperative to have an experienced “settlement planner” work directly with the personal injury victim.

Why You Need a Plaintiff “Settlement Planner”

Before talking about the planning-related issues that have become so important in today’s settlement landscape, I wanted to engage in a discussion and argument related to the importance to having a plaintiff-based “settlement planner” working with your client. First and foremost, it is vitally important to have a credentialed expert assisting with what will be the most important financial transaction of the injury victim’s life. A settlement is meant to last the remainder of that person’s life. Making sure all options are explored is critical. Secondly, making sure that client is properly protected in any transaction involving the insurance company and a structured settlement is imperative. Protecting yourself from liability in these transactions is exceedingly important as they are complex and highly specialized. Having an experienced team to guide you through the issues and make sure you don’t have malpractice exposure is critical.

I say that not to bash the other side, but to illustrate that their allegiance and concerns lie with their clients, the defendant insurance companies. Typically, there is an emphasis on structured settlements being the only possible solution to managing the client’s settlement proceeds. This is not limited to “brokers” that work for defendants. There are also plaintiff “brokers” who only offer annuities as a funding solution. However, a plaintiff-based settlement planner will rarely take this viewpoint. Instead, the settlement planner will offer options and solutions based upon the needs of the client. It is a needs-based planning approach that takes into consideration all of the factors that come into play for that particular client’s future plans. It looks at financial issues, future wants/needs, available healthcare options and management of the client’s future care well into the future. It typically will involve trusts, structured settlement annuities, life insurance, Affordable Care Act health insurance programs and other financial products. An analysis of preservation of needs-based government benefits programs is typically undertaken to help clients decide whether it is right for them to stay eligible for benefits such as Medicaid and SSI. It is a totally different perspective from those that are “structure brokers” for the defense that exclusively offer annuity-based solutions. A settlement planner’s goal is to guard against the personal injury plaintiff from being victimized a second time by poorly crafted solutions or, worse yet, a one-product-fits-all approach.

This is not to say that structured settlements do not have their virtues. They are an excellent choice for funding future quantifiable needs. A properly crafted structured settlement provides guaranteed income tax-free payment streams for the injury victim. A structure is also income tax-free to the death beneficiaries should something happen to the original annuitant (the injury victim). They also enjoy certain protections from creditors and judgments. There are no ongoing fees and costs associated with managing a structured settlement. The injury victim can transfer the risk of outliving the settlement dollars to a well-capitalized, highly-rated life insurance company. The tax-free returns, while conservative, are competitive with other fixed income products available in the marketplace. For the foregoing reasons, a tax-free structured settlement is frequently going to be part of the ultimate settlement plan for the injury victim. Frequently they are the cornerstone of the plan.

What Separates a “Settlement Planner” from the Rest?

Having the depth of knowledge to address all of the planning related issues at settlement is what separates a “settlement planner” from a “broker”. Things like understanding how the ACA works and its intersection with Medicaid/Medicare; being able to navigate thru Medicare Secondary Payer compliance issues and preservation of needs based public benefits; addressing the use of Qualified Settlement Funds (QSFs) and having a firm command of the types of settlement trusts that can be deployed (from SNTs to pooled trusts to Settlement Asset Management Trusts to ACA-optimized trusts). These are the cornerstone of the planner’s arsenal and are vital to proper planning in a catastrophic injury case. Below, I will address these issues in greater detail.

When you represent a catastrophically injured client who receives a large monetary settlement or award, many questions arise. Should the client seek Social Security Disability benefits and become Medicare-eligible? Should he or she create a Medicare set-aside? What if the client receives needs-based benefits such as Medicaid and Supplemental Security Income? Is coverage under the Patient Protection and Affordable Care Act a better or even an available option? How should the recovery be managed from a financial perspective? Is a trust appropriate, or a structured settlement? There are no easy answers to these questions, but here are some guidelines for navigating the terrain and advising your client.

Public Benefits

You need to understand the basics of public benefit programs and their differences to protect your client’s eligibility for them and plan for their recovery. Two primary public benefit programs are available to the injured and disabled: Medicaid with the intertwined Supplemental Security Income (SSI), and Medicare with the related Social Security Disability Income (SSDI). Receipt of a personal injury recovery can jeopardize a client’s eligibility for both programs.

Medicaid and SSI. SSI is a need-based cash assistance program administered by the Social Security Administration. To receive SSI, the person must be either 65 or older, or blind or disabled, plus he or she must be a U.S. citizen and meet the financial eligibility requirements. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. It is imperative in most situations to preserve some level of SSI benefits if Medicaid will be needed in the future. Medicaid provides basic health care coverage for those who cannot afford it. The state and federally funded program is run differently in each state, so eligibility requirements and available services vary. Because Medicaid and SSI depend on income and assets, a special needs trust may be necessary to preserve eligibility.

Medicare and SSDI. These are entitlement benefits and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough into the system can receive disability benefits regardless of their financial situation. SSDI is funded by payroll contributions to Federal Insurance Contributions Act (FICA) and self-employment taxes. Workers earn credits based on their work history. Medicare is a federal health insurance program, and benefits begin at age 65 or two years after becoming disabled. Medicaid can supplement Medicare coverage if the client is eligible for both programs. For example, Medicaid can pay for prescription drugs as well as Medicare copayments or deductibles. A special needs trust is not necessary to protect eligibility for Medicare benefits; however, the Medicare Secondary Payer Act may necessitate use of a Medicare set-aside.

Planning Techniques for Government Benefit Preservation

Protect Medicaid and SSI eligibility. The primary vehicle for protecting needs-based benefits is a special needs trust (SNT). Assets held in a special needs trust are not countable for purposes of Medicaid or SSI eligibility. Federal law governs the creation of and requirements for such trusts. First and foremost, a client must be disabled to create an SNT. There are two primary types of SNTs, each with its own requirements and restrictions. The (d)(4)(A) special needs trust is only for those who are under 65. This trust holds the personal injury victim’s recovery and is for the victim’s own benefit. Alternatively, a (d)(4)(C) trust, typically called a pooled trust, may be established with the disabled victim’s funds without regard to age. Both types of SNTs can be established by the injury victim, a parent, grandparent, guardian, or court order.

Protect future Medicare coverage. For any client who is a current Medicare beneficiary or reasonably expects to become one within 30 months, the Medicare Secondary Payer Act is implicated. According to CMS’s interpretation of this law, Medicare is not supposed to pay for future injury-related medical expenses covered by a liability or workers’ compensation settlement or award. In certain cases, a Medicare set-aside may be advisable to preserve future eligibility for Medicare coverage. A portion of the settlement is put into a segregated account and can be used only for the client’s injury-related care that would otherwise be covered by Medicare. Once the set-aside funds are exhausted, the client gets full Medicare coverage without Medicare seeking further contribution, reimbursement or subrogation. In certain circumstances, Medicare signs off on the amount to be set aside and agrees to be responsible for all future expenses once those funds are depleted.

Dual eligibility. If a client is a Medicaid and Medicare recipient, extra planning is in order. A Medicare set-aside can affect eligibility for needs-based benefits such as Medicaid and SSI, if it is not set up inside a special needs trust. Therefore, to maintain the client’s full benefits, the set-aside must be put inside an appropriate trust. A hybrid trust that addresses both Medicaid and Medicare is a complicated planning tool but one that is essential when you have a client with dual eligibility.

Financial Planning

After protecting public benefits, you should also consider how to best manage a client’s financial recovery. Should part of it be a structured settlement? Does the client need ongoing management of financial affairs or help from a fiduciary such as a corporate trustee? There are no right or wrong answers to these questions. Here are some options to consider to help your client make an informed decision.

One is to take the whole personal injury recovery in a lump sum. This lump sum is not taxable, but any investment gains are. This option does not provide any spendthrift protection and leaves the funds at risk for creditor claims, judgments, and waste. Also, the injured client has the sole burden of managing the money to cover future needs such as lost wages or medical expenses. As discussed above, the client would lose any needs-based public benefits.

The second option is a structured settlement to provide fixed periodic payments. A structured settlement’s investment gains are never taxed, it offers spendthrift protection, and the money has enhanced protection against creditor claims and judgments. A structured settlement recipient can avoid disqualification from public assistance if he or she also implements an appropriate trust, as discussed above.

A third option, which should always be considered, is a settlement trust. These are typically managed by a professional trustee and can also contain provisions to help preserve needs-based benefits. Settlement trusts provide liquidity and flexibility that a structured settlement cannot offer, and at the same time protect the recovery. The investment options become limitless and the trust can always be paired with a traditional structured settlement. It also protects the structured settlement from being sold to a factoring company (i.e., J.G. Wentworth). Having a professional trustee in place that has a fiduciary duty to the client provides security and a trusted resource for life and financial management issues. In certain cases, this solution makes a lot of sense because of its ability to adapt to changing circumstances. When a disabled injury victim has needs that are not easily quantifiable or predictable, the settlement trust can adjust to the client’s needs. When a settlement trust is paired with a structured settlement, the client can have guaranteed income for life and sufficient liquidity.

Conclusion – Identify Clients Who Need Planning

You must establish a method of screening your files to identify clients who are sufficiently disabled to warrant further planning and determine whether you should consult outside experts. The easiest way to remember the process is the acronym CAD:

C—consult with competent experts who can help deal with these complicated issues.
A—advise the client about the available planning vehicles or have an outside expert do so.
D—document your efforts to protect your client.

If the client declines any type of planning, document the advice and education provided and have the client sign an acknowledgement. If he or she elects a settlement plan, hire skilled experts to put the plan together so they can help you document your file properly to close it compliantly.

Disabled clients especially need counseling given the likelihood they will be receiving some type of public benefits. To prevent being exposed to a malpractice suit, you should understand the types of public benefits for a disabled client and techniques for preserving them.

Getting CMS Approval Faster

B. Josh Pettingill

The Centers for Medicare and Medicaid Services (CMS) approval of a Medicare Set-Aside is a voluntary process but getting CMS approval has become the standard practice when resolving catastrophic workers’ compensation cases with Medicare eligible, injured workers. There are countless ways that an approval can be delayed. If any of the following items are missing or not accurate within the submission, the case can be “developed” which in laymen’s terms means investigated and further delayed.[1]

However, the most common reasons we see firsthand as to why there are interruptions with CMS approval are the following:

Line items in the report were either not priced correctly, and/or omitted purposely or inadvertently by the employer/carrier’s MSP compliance expert;
The most recent medical records or payouts were not included with the submission;
The MSA was submitted as a “lump sum” allocation when it should have been submitted as an “annuity funded” allocation.

It is vital to have your own MSA expert review any proposed MSA allocations by the defendant and have the option to prepare an independent WCMSA analysis or medical cost projection. That way, you can be certain that the MSA is an accurate reflection of the future medical costs for purposes of negotiations, as well as ensure expedited CMS approval of the MSA. Furthermore, all MSAs should be submitted as an annuity funded MSA. If CMS approves a different amount, whether it be lower or higher, you have the correct parameters for funding the MSA.

[1] https://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Workers-Compensation-Medicare-Set-Aside-Arrangements/Downloads/WCMSA-Reference-Guide-Version-2_8.pdf

Injury Victim Gets Part B Denial of Care by Medicare

Jason D. Lazarus, J.D., LL.M., CSSC, MSCC

In the past, trial lawyers never had to worry about whether Medicare would pay for their client’s future care post-settlement. There is cause for concern that this may not be the case in the future. Consider this scenario – you represent a current Medicare beneficiary in a third-party liability case. As part of the workup of the case, you determine the client will need future medical care related to the injuries suffered. This could be determined by either deposing the treating physician or by the creation of a life care plan for litigation purposes. Ultimately, you settle the case. Since the client is a Medicare beneficiary, the defendant will report the settlement under the Mandatory Insurer Reporting law as it is greater than $750.00 in gross settlement proceeds. The defendant puts some language into the release about a Medicare Set-Aside being the injury victim’s responsibility and that they can’t shift the burden. Everyone signs the release and settlement dollars are paid. The file is closed, then forgotten. But what if that course of action triggers a denial of future care by Medicare?

For many years this was not even a concern for trial attorneys and their clients. However, the risk of this occurring is now a very real possibility. In fact, last year, a personal injury victim got this type of notice of denial for injury-related care from Medicare. The service provided was hospital outpatient clinic services under Part B of Medicare. The bill was denied, based upon the notice, because Medicare said “you may have funds set aside from your settlement to pay for your future medical expenses and prescription drug treatment related to your injury (ies).” The denial was related to a 2014 personal injury settlement wherein the Medicare beneficiary was paid money as damages for future injury-related care. Medicare’s position that an injury victim can’t settle their case and shift the burden to the Medicare Trust Fund for injury-related care isn’t new. Medicare has stated this premise over and over. This is just the first time anyone has seen an actual denial.

So, the question going forward is whether this was an isolated denial or actually represents Medicare’s shift to active enforcement of the Medicare Secondary Payer Act’s central premise. While it may provide some comfort to think this is an isolated incident, the reality is that Medicare Set-Asides are clearly a top priority and on the radar for CMS. As noted before in previous posts, there is currently an OMB Rulemaking process going on related to the Medicare Secondary Payer Act and Medicare Set-Asides. The insurance industry, the plaintiff bar, and industry stakeholders are all bending CMS’s ear regarding a future process. It is expected that proposed regulations will be disseminated sometime in the fall of 2019. The question in the interim is, what do you do to protect yourself from a malpractice claim and protect your client from a denial?

Unfortunately, there is no cookie-cutter answer. It is a case-by-case analysis. In some instances, there may be an argument that future medicals aren’t funded at all by the settlement. In other cases, there might be an argument that a reduced amount of future medicals should be set aside to satisfy obligations under the MSP because the case settled for less than full value. There are just too many possibilities to give a simple one size fits all answer. However, what is clear, doing nothing has its risks. For example, the client who received the denial of care likely will face a lengthy appeals process within Medicare that must be exhausted before ever getting to step foot into a Federal district court. In that scenario, the client is going to have to decide between paying out of their own pocket for future care or waiting for the care until exhausting all appeals and prevailing over Medicare.

While the problem created for the client is a serious one if they are denied care, an equally scary proposition for the trial lawyer is their exposure for malpractice claims in this scenario. Let’s assume that the injury victim who got this denial letter was not properly advised of the risks of failing to set aside money, would the trial lawyer potentially face a suit for legal malpractice? The answer is most likely they would. There could be all sorts of arguments made about whether they fell below the standard of care, but in the end, this is a known issue and one that is of the law. Worse yet, a trial lawyer and his/her firm could have Medicare breathing down their necks. While we haven’t see any instances of Medicare pursuing a law firm over failing to set up a Medicare Set-Aside, there are recent examples of law firms being pursued by the Department Of Justice (DOJ) related to other aspects of the MSP and failing to have a process internally to ensure compliance with the MSP. As part of a recent 2019 settlement after the DOJ brought action against a Maryland personal injury law firm, the firm agreed to pay $250,000 to resolve MSP claims and also agreed “to (1) designate a person at the firm responsible for paying Medicare secondary payer debts; (2) train the designated employee to ensure that the firm pays these debts on a timely basis; and (3) review any outstanding debts with the designated employee at least every six months to ensure compliance.” This was the second such settlement in a little over a year.

With these kinds of risks at stake, why do personal injury firms take their chances with the potential for denials of care, malpractice actions and worse yet government action? The answer is pretty simple, there is a lack of clarity of information and education about responsibilities under the MSP by Medicare. It falls upon industry stakeholders to try and make all the parties who are involved in personal injury lawsuits aware of these issues and how to effectively deal with them. So then the question is how do you make sure you are totally Medicare compliant?

Realizing there isn’t a definitive answer related to set-asides, we do have some recommendations:

Put into place a method of screening your files to determine those that involve Medicare beneficiaries or those with a reasonable expectation of becoming a Medicare beneficiary within 30 months.
Contact Medicare and report appropriately the settlement to get a final demand.
Audit the final demand and avail yourself of the compromise/waiver process for conditional payments.
Consult with client and explain the possibility of loss of future benefits without a Medicare Set-Aside so that an informed decision can be made about available options to consider Medicare’s future interests.
Identify any potential Part C/MAO liens and resolve those as well.

Start early and do not let the defendant-insurer control the Medicare compliance process. At the outset of your case you have to confirm disability eligibility with Social Security and get copies of all insurance as well as government assistance cards. Make sure you understand who is potentially Medicare eligible such as those who are on SSDI, those turning 65, someone with end-stage renal disease (ESRD), Lou Gehrig’s disease (ALS) or a child disabled before age 22 with a parent drawing Social Security benefits. Collaborate with the other side regarding what is being reported under Mandatory Insurer Reporting laws. Be active in mandating the proper ICD codes to be included in the release to make sure reporting is accurate.

If a client is a Medicare beneficiary, then evaluate with the client the possibility of a set-aside. Discuss with competent experts the proper steps for MSP compliance. Properly word the release if a set aside is being used to make sure the client doesn’t get saddled with inappropriate language or lose itemized deductions. Appropriate planning will avoid a bad outcome.

Medicare beneficiaries must understand the risk of losing their Medicare coverage should they decide to set aside nothing from their personal injury settlement for future Medicare-covered expenses related to the injury. Properly educating the client is key to ensure an informed decision can be made relative to these issues. Beyond education of the client, the most critical issue becomes how to properly document your file about what was done and why with regard to MSP compliance. This part is where the experts come into play. For most practitioners, it is nearly impossible to know all of the nuances and issues that arise with the Medicare Secondary Payer Act. From identifying liens, resolving conditional payments, deciding to set money aside, the creation of the allocation to the release language and the funding/administration of a set-aside, there are issues that can be daunting for even the most well informed personal injury practitioner. Without proper consultation and guidance, mistakes can lead to unhappy clients, or worse yet, a legal malpractice claim.

Representing Clients with Government Benefits

Jason D. Lazarus, J.D., LL.M., CSSC, MSCC

If you are confused by the myriad of government benefit programs that many clients receive as a result of being a personal injury victim, don’t worry as you are not alone. Most times personal injury victims are not sure either about the benefits they receive and can confuse the different programs. This is not surprising as the acronyms for the programs are similar and governed by the same or similar government agencies. For example, a disabled client might get Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). While similar in terms of who qualifies and both provided by the Social Security Administration, how you qualify for each are vastly different. Another example is Medicare and Medicaid. Both involve the same agency, Centers for Medicare & Medicaid Services; however, Medicare is an entitlement that is administered entirely federally while Medicaid is income/asset sensitive and is administered mostly at the state level. All of these benefits have unique issues and different planning solutions must be employed.

The goal of this post is to clarify the information and make it easy to understand.

The following chart is a good starting point to understanding public benefits:

To understand the table, you should know a few acronyms.

While the SS in SSDI and SSI stand for different things, you can use these first two letters as an easy way to remember that both are offered by the Social Security Administration.
VA stands for Veterans Administration.
SNT and PSNT stand for Special Needs Trust and Pooled Special Needs Trust, respectively.
MSA stands for Medicare Set-Aside.
There is no such thing as a Medicaid Set-Aside and there are many differences between how SNTs and MSAs operate.

Many times there is confusion about the proper planning solutions a client might need but by the time you are done reading this post, it should be much clearer.

Understanding Public Assistance Programs

There are two primary public benefit programs that are 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 that 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 (“dual eligible”). For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles. Because Medicaid and SSI are income and asset sensitive, creation of a special needs trust and/or ABLE account may be necessary, which is discussed in greater detail below.

Some other benefits that are needs-based are Food Stamps, Supplemental Nutritional Assistance Program (SNAP), Section 8 (housing) and some Veterans Administration benefits (non-service connected). Since these benefits are not necessarily protected by the use of traditional planning tools like an SNT, these are more complex to protect. In many instances, it makes more sense to lose these benefits and allow an SNT to pay for these needs or use an ABLE account to pay for those types of expenses. What complicates the payment of some of these types of benefits is the SSI restriction on paying for food & shelter. That is where an ABLE account can come in handy since it is exempt from such rules (but there are limitations on who can create an ABLE account). There are also some other financial-based planning techniques to try and preserve these benefits, but it does vary by program so consulting with an expert is imperative to help with the planning.

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 in enough quarters into the system can receive disability benefits without regard to 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 65 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. Accordingly, a special needs trust is not necessary to protect eligibility for these benefits. However, the MSP may necessitate the use of a Medicare Set Aside discussed in greater detail below.

Planning Tools for Public Benefit Recipients

Medicaid/SSI

For those that receive needs-based public benefits such as SSI/Medicaid, there are planning devices that can be utilized to preserve eligibility for disabled injury victims. A special needs trust can be created to hold the recovery and preserve public benefit eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility. The creation of a special needs trusts is authorized by Federal law. Trusts commonly referred to as (d)(4)(a) special needs trusts, named after the Federal code section which authorizes their creation, are for those under the age of 65. Another type of trust is authorized under by Federal law with no age restriction and it is called a pooled trust, commonly referred to as a (d)(4)(c) trust.

The 1396p provisions in the United States Code governs the creation and requirements for such trusts. First and foremost, a client must be disabled in order to create an SNT. There are two 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 65. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. It can be established by the injury victim themselves, a parent, grandparent, guardian or court order. Second is a (d)(4)(C) trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age. A pooled trust can be established by the injury victim and others just like a (d)(4)(A). Both trusts operate identically and provide for the special needs of a client. The primary restrictions on use of the money are that it must be for the sole benefit of the trust beneficiary, the trust cannot provide cash and it cannot be used for food or shelter (for those that receive SSI). Other than that, it can provide for nearly anything that improves the trust beneficiary’s quality of life.

Oftentimes, an ABLE account can be used in conjunction with an SNT or instead of an SNT. An ABLE account is a tax-advantaged savings account for disabled individuals. An ABLE account can pay for any “qualified disability expense” which is quite broad and does not impose restrictions on food/shelter payments. An ABLE account can only be established by someone who is disabled and whose onset of disability occurred prior to turning 26 years of age. An ABLE account can only be funded up to a maximum amount of $15,000 annually and only the first $100,000 in funding is exempt from the SSI asset/resource test. ABLE accounts remain a limited option and only makes sense in certain circumstances.

Medicare/SSDI

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 Medicare Secondary Payer Act (“MSP”). Since under the MSP Medicare is not supposed to pay for future medical expenses covered by a liability or Workers’ Compensation settlement, judgment or award, 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 ever 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. 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. All of the uncertainty surrounding set-asides creates a difficult situation for Medicare beneficiary-injury victims and contingent liability for legal practitioners as well as other parties involved in litigation involving Medicare beneficiaries. There do appear to be regulations on the horizon for set-asides based upon Medicare’s renewed focus on it for 2019. For the time being, a set-aside analysis should be considered for settlements or judgments involving current Medicare beneficiaries.

Dual Eligibility – Medicare & Medicaid

Clients who receive both Medicaid and Medicare require extra planning to preserve all government benefits. 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 Special Need Trust, 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.

Conclusion – Protect Your Client, Protect Your Firm

Disabled clients need counseling at settlement given the likelihood they will be receiving some type of government benefits. To prevent being exposed to a malpractice cause of action, the personal injury practitioner should understand the types of public benefits that a disabled client may be eligible for and techniques that are available to preserve those benefits. Having this knowledge will help the lawyer identify disabled clients they may want to refer for further consultation with other experts.

When a settlement involves the protection of public benefits or settlement assets, outside counsel is typically retained to assist with the trust devices commonly used to protect the client. Lawyers who are well-versed in “settlement law” or “settlement planning” can be found and relied upon to assist with these difficult and complicated issues. The legal fees for creation of the trusts to protect the settlement monies or public benefit eligibility are normally paid for out of the injury victim’s recovery.

Companies such as Synergy deal with these issues on a daily basis. Having a consultant familiar with the planning issues and who has access to the right solutions is imperative. This is where Synergy’s settlement consulting/planning team really shines and can be an invaluable member of your settlement team. Having the knowledge of the public benefit programs along with issues such as Affordable Care Act coverage and options is a non-negotiable these days given the complex settlement landscape.

To learn more watch representing clients with government benefits watch our educational video below.