By Thomas D. Begley, Jr., CELA

This is the second in a series of articles dealing with lien resolution in personal injury cases.

Medicare Advantage and Prescription Drug Plans

Medicare Part C. commonly known as Medicare Advantage, is a Medicare substitute program operated by private health insurance companies as a managed care plan. Medicare Part D similarly provides prescription coverage to eligible beneficiaries through private insurance plans. To the extent a reimbursement right may be created under a specific MAO plan, the Part C statute itself limits any recovery from a beneficiary to the amount actually received from a third party as payment for plan-covered expenses.1

ERISA Plans

Generally, employer-sponsored benefits plans are governed by the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA.2 However, certain employers and their benefits plans are not subject to ERISA. These include governmental plans;’ church plans:’ plans maintained solely for the purpose of complying with applicable Workmen’s Compensation, unemployment compensation, or disability insurance laws;5 a plan maintained outside of the UnitedStates primarily for the benefit of persons who are virtually all non-resident aliens;6 or an excess benefit plan.” ERISA preempts state law that “relates to” an ERISA governed plan;8 however, ERISA does not exempt or relieve any person from complying with any law of any state that regulates insurance, banking, or securities.9 Neither an employee benefit plan nor any trust established under such a plan shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company.10 As a result of this statutory framework, any self-insured employee benefit plan regulated under ERISA enjoys federal preemption of state law, but an insurance company insuring such a plan does not. Such insurance companies are regulated by state law, including laws concerning subrogation and reimbursement.11 If an ERISA plan is insured, the insurance company is subject to state law and the plan is bound by state insurance regulations insofar as they apply to the plan’s insurer. ERISA itself is silent with respect to subrogation and reimbursement, neither requiring a welfare plan to contain a subrogation clause nor barring such a clause or otherwise regulating its content12

Federal Employee Health Benefit Act

The Federal Employee Health Benefit Act (FEHBA) provides group health insurance for federal employees.13 Although there is no statutory right of subrogation or reimbursement. FEHBA contains a preemption provision under which the terms of insurance contracts issued by its private carriers purportedly preempts state and local law.1″1 However, the Supreme Court has held that FEHBA does not provide contract insurers with a federal cause of action or federal jurisdiction in a subrogation/reimbursement claim, leaving the matter to the state courts, and it further called into question whether a FEHB plan may assert any contractual recovery right at all against a beneficiary where such claims are prohibited by state law; the Court was “not prepared to say” that a carrier’s contract with the government “would displace every condition state law places on that recovery.”15

Federal Medical Care Recovery Act

The federal statutory scheme provides several independent bases for recovery of medical costs expended on behalf of government personnel and their dependents for injury or disease not connected to their military or other government service, but the Federal Medical Care Recovery Act (FMCRA)16 establishes standards generally applicable to claims of all federal departments and agencies. Significantly, while the government may exercise its recovery rights under the statute by making claims directly against third-party tortfeasors, the statute authorizes no such claims against a beneficiary. The statute provides, inter alia, that in any case in which the United States furnishes or pays for medical or dental care and treatment under circumstances creating third-party tort liability for such expenses, the United States shall have a right to recover from the third party the reasonable value of such care and treatment.17 The United States also has an independent right to recover from the third party the total amount of pay fora member of the Uniformed Services for any period in which the member is unable to perform his or her duties as a result of the injury or disease and is not assigned to perform other military duties.18

Veterans Administration and TRICARE Claims

The Veterans’ Benefits Act19 and the Armed Forces Act20 establish the Veterans Administration and TRICARE/CHAMPUS healthcare programs, respectively. Neither the VA nor TRICARE/CHAMPUS statutes allow for a lien or reimbursement claim against a beneficiary’s personal injury recovery. The government does have a subrogation right if it chooses to pursue its own claim against a third party: however, the statutes specifically governing the programs have a very narrow definition of “third party” that does not include a tortfeasor, but is specifically limited to public and private healthcare payors.21 Moreover, applicable regulations spell out that a beneficiary only has a duty to cooperate with the government’s third-party claim, and the extent of that cooperation itself is rather limited, merely obliging a beneficiary to provide necessary information for the government’s third-party claim.22  Moreover, the government’s claim is expressly limited by both statute and regulation to the extent of liability under state tort law, so federal preemption of state liability rules does not apply.

142 U.S.C. §1395w-22(a).

229 U.S.C. §, 1003.

329 U.S.C. § 1003(b)(1).

429 U.S.C. § 1003(b)(2).

529 U.S.C. § 1003(b)(3).

629 U.S.C. § 1003(b)(4).

729 U.S.C. § 1003(b)(5).

*29 U.S.C. ^ 1144(a).

“29 U.S.C. § 1144(b)(2)(A).

,0 29 U.S.C. § 1144(b)(2)(B).

11 FMCCorp. v.Holhday,498 U.S. 52 (1990).

13 Ryan v. Federal Express Corp.. 78 F.3d 123 (3d Cir. 1996).

13 38 U.S.C.§ 1725(a)(1).

M5 C.F.R. § 890.

15 Empire UealthChoice V. McVeigh.547 U.S. 677 (2006).

16 42 U.S.C. §2651.

1742 U.S.C. §2651 (a).

18 42 U.S.C. § 2651(b).

19 38 U.S.C. § 1729.

20 10 U.S.C. §1095.

21 38 U.S.C. § 1729(i)(3)and 10 U.S.C. § 1095(h)(1).

22 32 CFR §§ 199.12 and 220.9

By Thomas D. Begley, Jr.

WHAT IS A QUALIFIED SETTLEMENT FUND?

468B of the Internal Revenue Code[1] authorizes the establishment of Designated Settlement Funds or Qualified Settlement Funds. These funds are usually collectively referred to as Qualified Settlement Funds (QSFs). These funds are also sometimes called 468B Trusts. The purpose of these funds is to permit a defendant in certain types of litigation to deposit funds into a trust and to receive a full and complete release of liability. The defendant is entitled to a current income tax deduction for the amount paid into the fund at the time the funds are deposited into the trust. This is an exception to the general rule under which the tax deduction is not permitted until the funds are actually disbursed to the plaintiff, which is normally the time in which the plaintiff has received the “economic benefit” of the settlement.

QSFs arose out of class action lawsuits. They can be very useful in personal injury actions and other types of cases where there are multiple plaintiffs. The QSF is usually established prior to trial. The parties agree on a global settlement. The defendant pays that amount into the QSF and the plaintiffs can then take their time in allocating the settlement among themselves and in dealing with various liens, such as Medicaid, Medicare, ERISA, and other liens. The QSF could also be established after a jury award, as long as there is an appeal pending.

A QSF need not be a trust. It may be a fund, account, or trust under state law, or its assets must be otherwise segregated from the transferor’s (or related person’s) other assets.[2] Good practice dictates a written trust agreement. An attorney’s trust account could theoretically serve as a QSF.[3] The problem is that State IOLTA (Interest on Lawyer Trust Accounts) Rules require that income from the attorneys’ trust accounts be paid not to the clients but to State IOLTA funds.

When a QSF is being used for asbestos cases, special rules apply.[4]

ADVANTAGES

There are advantages to both the plaintiff and the defendant in utilizing a 468(b) trust.

Advantages to the Defendant. Advantages to the defendant utilizing a QSF include the following:

• Defendant Removed from Litigation. Defendants want to be out of the case. By using a QSF a defendant can pay and go. The defendant pays the funds into the QSF and the plaintiffs later deal with liens, allocate the settlement between themselves, determine how much should be lump sum and how much to structure, determine whether any Special Needs Trusts are required, and wait while a guardian is appointed for an incapacitated plaintiff, if required.
• Deduction to Defendant. Defendants and their insurers are able to obtain immediate tax deductions, rather than waiting for “economic performance” to occur.

Advantages to the Plaintiff. Advantages to the plaintiff utilizing a QSF include the following:

• Defendant Removed from Allocation of Settlement. Where QSF trusts are used, the defendant leaves to the plaintiff the issue of allocating the settlement among injured parties. This often gives the plaintiff greater flexibility in shaping the settlement. There are often advantages to allocating portions of the settlement to family members other than the injured plaintiff.
• Plaintiff’s Attorneys’ Fees and Costs. When a QSF trust is used, the plaintiff’s counsel can be paid fees immediately from the QSF and litigation expenses can also be paid.
• Income to Plaintiff. The plaintiff will immediately begin to receive income from the settlement held by the QSF trust. Without the trust, the defendant would be holding the money and the plaintiff would not be receiving the benefit of the income.
• Negotiations. Time is no longer a factor in negotiations with Medicare, Medicaid, ERISA, and third-party insurers. Additional time is available to negotiate and satisfy those liens.
• Forms of Distributions. Establishment of a QSF trust gives the plaintiff time to determine how much of the settlement to take as a lump sum and how much, if any, to structure.
• Conflict Resolution Among Related Plaintiffs. A QSF trust gives the plaintiff’s attorney, who may be representing more than one family member, time to resolve conflicts between them. One parent may have abandoned the injured child, for example. The other parent may be the custodial parent providing almost total care. How much does each parent receive?
• Removes Defense Structured Settlement Broker from the Case. The relationship between plaintiff’s structure brokers and defense brokers can be rancorous. If the QSF purchases the structure, the defense broker is effectively removed from consideration.

• Eliminates the Risk of Insolvency. If plaintiffs believe that the defendant or the defendant’s insurer is financially unstable, the QSF can be used as a vehicle into which funds can be immediately transferred.
• International Litigation. QSFs can be used to collect settlements from defendants that are located outside the country and can be used by foreign plaintiffs to collect from defendants located in the country.
• In cases involving a large number of claimants, an administrator of a QSF can obtain a Qualified Protective Order (QPO) that complies with the requirements of HIPAA and allows for limited use of Protected Health Information (PHI). This avoids the necessity of obtaining specific HIPAA releases from each settling claimant. Those releases would otherwise be necessary to negotiate subrogation claims in personal injury cases. A QSF administrator often retains the services of an outside vendor for lien resolution. The vendor may be required to disclose PHI to a number of different parties in order to secure release or payment requirements to settle the claims. The QPO is a good solution. A QPO is defined as an order of the court or of an administrative tribunal or a stipulation by the parties to the litigation or administrative proceeding that prohibits the parties from using or disclosing the PHI for any purpose other than the litigation or proceeding for which the information was requested.[5] The regulation further requires the return to the covered entity or destruction of the PHI at the end of the litigation or proceeding.
• Assists Structuring Attorneys’ Fees. Once settlement proceeds are deposited in an attorney trust account, it is too late for the lawyer to structure his fee. By making the deposit into a QSF, plaintiff’s counsel has time to consider payment options including whether or not to structure his fee.
• Multiple Defendants. A QSF can also be useful in cases involving multiple defendants or where all disputes with a single defendant cannot be resolved at one time. All monies can be held in a QSF until all defendants settle.

DISADVANTAGES

A disadvantage of establishing a QSF is the cost. There are fees for the drafting of the trust document including all of the ancillary services, such as obtaining information and explaining the document to all of the parties, filing fees, administration and trustee fees, and, possibly, CPA fees for preparing tax returns. A QSF may not be warranted in smaller cases.

TYPES OF CLAIMS

Which claims are permitted and which are not are considered in the following sections.

Permitted Claims. A QSF can be used in claims involving:

• Tort,[6]
• The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),[7]
• Breach or contract,[8] or
• Violation of law.[9]

In a Private Letter Ruling,[10] the I.R.S. approved the use of a QSF in connection with a bankruptcy case. In that case, the trust was approved by a confirmation order issued by the U.S. Bankruptcy Court, which had continuing jurisdiction over the trust. The trust was established under the laws of the state to resolve employees’ wrongful discharge claims filed under potential theories of tort, breach of contract, or a violation of law. Further, the discharged employees are not general trade creditors of the debtor, nor do their claims belong to any other class excluded by the regulation. Accordingly, the trust is a QSF. The I.R.S. ruled that the debtor is the transferor.

Prohibited Claims. QSFs may not be used in cases:

• Arising from worker’s compensation or self-insured health plan,[11]
• Involving liabilities to refund the purchase price of or repair or replace products sold in the ordinary course of the transferor’s business,[12] or
• Involving the obligation of the transferor to make payments to its general trade creditors[13] and debt holders relating to a bankruptcy case or workout.

INCOME TAX CONSIDERATIONS

There are several income tax issues that must be considered in connection with QSFs.

Economic Performance. Economic performance shall be deemed to occur as qualified payments are made by the taxpayer, usually the defendant’s insurer, to a Designated Settlement Fund (QSF).[14] This means that the defendant receives an immediate tax deduction upon depositing the funds in the QSF.

Constructive Receipt. Deposit of the funds in the QSF is not constructive receipt. Because the taxpayer’s receipt of income is subject to substantial limitations, constructive receipt is avoided.[15]

Taxation of Qualified Settlement Funds. Income earned by the QSF is taxed at a rate equal to the maximum rate in effect for such taxable year for trusts.[16] For 2016, the QSF rate is 39.6 percent.[17] All income is taxed at the same rate, there are no lower brackets. The tax is based not on gross income, but on modified taxable income.

The 3.8 percent Medicare tax on unearned income also applies.[18] The tax is the lesser of the undistributed net investment income for such taxable year, or the excess (if any) of:[19]

• The adjusted gross income for such taxable year over.
• The dollar amount of which the highest tax bracket begins for such taxable year.

Because QSFs are separate tax entities and pay tax on any interest and dividend income, the after-tax income then becomes part of the settlement fund and distributions to the claimants can be made with after-tax dollars.

Attorneys’ Fees.

• Plaintiff’s Attorney’s Fees. In most instances, the transferor will transfer to the QSF the entire settlement amount, including that portion that is payable to the personal injury attorney or attorneys for attorneys’ fees under the engagement letters signed between the plaintiffs and plaintiffs’ attorney. In rare instances, the transferor will pay the plaintiff’s attorneys’ fees directly and only transfer to the QSF the net amount due to the plaintiff. When attorneys’ fees are paid to the QSF, they do not represent gross income to the QSF, and when they are paid by the QSF they do not represent a tax deduction to the QSF. The QSF administrator/trustee must determine whether disbursements are subject to withholding requirements and whether disbursements of attorneys’ fees to class counsel in the underlying litigation are reportable.[20]
• QSF Attorneys’ Fees. Normally, a QSF will engage a law firm to perform legal services on behalf of the QSF. Such legal expenses are necessary to administer the QSF and to process claims and are deductible by the QSF as ordinary business expenses.[21] Whether or not the legal fee is immediately deductible or must be capitalized is determined by the origin of the claim.

THE 468B TRUSTEE/TRUST ADMINISTRATOR

The Regulations require that a QSF have an “Administrator.”[22] Unless the QSF is a trust, it is not required to have a trustee. If the QSF is a trust, the same person can serve as both Trustee and Administrator or there can be a separate trustee and a separate Administrator. Generally, the Trustee/Administrator is selected by the plaintiff’s attorney. If there is a separate Trustee and Administrator, the duties of each must be clearly defined in the trust document.

In some instances, a court will require an individual trustee to be bonded, which may be difficult or even impossible. A solution is to appoint the individual as Trust Administrator and appoint a Corporate Trustee. The trust document can give the Administrator the duty to make disbursements subject to court order. The Corporate Trustee would take the QSF deposit, subject to the court order, preventing any release of the funds without prior court approval. A similar result might be achieved by having an individual serve as Trustee/Administrator subject to a “safekeeping agreement” with a cooperating bank. The bank would accept the QSF deposits under court order preventing funds from being released without prior court approval.

DISTRIBUTIONS

The Trustee/Administrator is responsible for making distributions from the QSF to claimants, claimants’ attorneys, State Medicaid Agencies to satisfy liens, CMS to satisfy Medicare liens, ERISA Plans to satisfy ERISA liens, and any other lien holders that require satisfaction from the settlement fund.

STRUCTURED SETTLEMENTS

The Trustee/Administrator will be responsible for arranging structured settlements, including making a § 130 Qualified Assignment to a third-party assignee who will make the periodic payments.

[1] I.R.C. § 468B.

[2] Treas. Reg. § 1.468B-1(c)(3).

[3] P.L.R. 200216013 (Jan. 16, 2002).

[4] I.R.S. § 524b.

[5] 45 C.F.R. § 164.512(e)(1)(i).

[6] Treas. Reg. § 1.468B-1(c)(2)(ii).

[7] Treas. Reg. § 1.468B-1(c)(2)(i); 42 U.S.C. § 103.

[8] Treas. Reg. § 1.468B-1(c)(2)(ii).

[9] Treas. Reg. § 1.468B-1(c)(2)(ii).

[10] Priv. Ltr. Rul. 14-90-64-(2005).

[11] Treas. Reg. § 1.468B(1)(g)(3)(1).

[12] Treas. Reg. § 1.468B(1)(g)(3)(2).

[13] Treas. Reg. § 1.468B(1)(g)(3)(3).

[14] I.R.C. § 468B(a).

[15] Treas. Reg. § 1.451-2.

[16] I.R.C. § 468B(b)(1) and I.R.C. § 1(e).

[17] I.R.C. § 411(b).

[18] I.R.C. § 1411(a)(2).

[19] I.R.C. § 1411(a)(2).

[20] I.R.C. § 6041.

[21] Treas. Reg. § 1.468B-2(b)(2).

[22] Treas. Reg. § 1.468B-2(k)(3).

by Thomas D. Begley, Jr., CELA

Generally, employer-sponsored benefits plans are governed by the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA.[1] However, certain employers and their benefits plans are not subject to ERISA. These include governmental plans;[2] church plans;[3] plans maintained solely for the purpose of complying with applicable Workmen’s Compensation, unemployment compensation, or disability insurance laws;[4] a plan maintained outside of the United States primarily for the benefit of persons who are virtually all non-resident aliens;[5] or an excess benefit plan.[6] ERISA preempts state law that “relates to” an ERISA-governed plan;[7] however, ERISA does not exempt or relieve any person from complying with any law of any state that regulates insurance, banking, or securities.[8] Neither an employee benefit plan nor any trust established under such a plan shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company.[9]

As a result of this statutory framework, any self-insured employee benefit plan regulated under ERISA enjoys federal preemption of state law, but an insurance company insuring such a plan does not. Such insurance companies are regulated by state law, including laws concerning subrogation and reimbursement.[10] If an ERISA plan is insured, the insurance company is subject to state law and the plan is bound by state insurance regulations insofar as they apply to the plan’s insurer. ERISA itself is silent with respect to subrogation and reimbursement, neither requiring a welfare plan to contain a subrogation clause nor barring such a clause or otherwise regulating its content.[11]

[1] 29 U.S.C. § 1003.

[2] 29 U.S.C. § 1003(b)(1).

[3] 29 U.S.C. § 1003(b)(2).

[4] 29 U.S.C. § 1003(b)(3).

[5] 29 U.S.C. § 1003(b)(4).

[6] 29 U.S.C. § 1003(b)(5).

[7] 29 U.S.C. § 1144(a).

[8] 29 U.S.C. § 1144(b)(2)(A).

[9] 29 U.S.C. § 1144(b)(2)(B).

[10] FMC Corp. v. Holliday, 498 U.S. 52 (1990).

[11] Ryan v. Federal Express Corp., 78 F.3d 123 (3d Cir. 1996).

by Thomas D. Begley, Jr., Esquire, CELA

When a defendant causes the death of another individual by a wrongful act or negligence, that person shall be liable for damages. There are two components of the claim. One is a Survival Claim, and the other is the Wrongful Death Claim. The Survival Claim is brought by the estate, either by the executor under a will or the administrator, if the decedent died intestate. For monies received under the Survival Claim, there is usually some confusion about who is entitled to the damages payable to the estate. Generally, the monies are paid to the individuals who would inherit under the New Jersey Intestate statute. This means that the surviving spouse would take 100%. However, there is an exception, if the decedent is survived by a surviving spouse and one or more surviving decedents. In this case, they are entitled to equal proportions for purposes of recovery, notwithstanding the New Jersey Intestacy statute. So, if they are a family with a surviving spouse and three children, each claimant would take 25%.

Under the Wrongful Death Claim, the court allocates damages in such a way to result in a fair and equitable apportionment among claimants, taking into account the age of the dependents, their physical and mental condition, the necessity or desirability of providing them with educational facilities, their financial condition, and the availability to them of other means of support, present and future, and any other relevant factors that will contribute to a fair and equitable portion of the amount recovered.

A major issue is how much should be allocated to the Survival Claim and how much to the Wrongful Death Claim. In many cases, one consideration is New Jersey estate tax and, in some cases, federal estate tax is an issue. Occasionally, New Jersey inheritance tax must also be considered. If the Survival Claim exceeds $5,430,000 in 2015, it is subject to federal estate tax. If the Survival Claim exceeds $675,000, it is subject to New Jersey estate tax. If the beneficiaries of the estate are not blood relatives of the decedent, there will be New Jersey inheritance tax. Monies allocated to the Wrongful Death Claim are not subject to federal or state estate taxes or inheritance taxes. Neither the Survival Claim nor the Wrongful Death Claim are subject to federal or state income taxes.

The second issue is Medicare, Medicaid, ERISA and other liens. Liens would attach to the Survival Claim, but not to the Wrongful Death Claim.

[This article was originally printed in the Barrister, a publication of the Camden County Bar Association in November, 2014.]

Many business and professional people, including lawyers, have worked a long time and accumulated significant assets. There is an old saying: “It not what you earn, it is what you keep.” We live in a litigious society. Business and professional people have significant exposure to claims from creditors, because of the activities in which they engage and because they have assets and, therefore, make good targets. This is the first of a three-part article exploring strategies to protect hard-earned assets from claims of creditors. There are steps that can be taken to protect assets from these claims, if they are taken in a timely manner. An individual cannot wait until a claim is filed, or even until an incident has occurred that may lead to a claim, before taking action. Steps must be taken in advance. The Fraudulent Transfer Act is discussed below. This article will discuss the strategies for asset protection from simple to complex. Useful strategies include obtaining the proper insurance, proper titling of assets, retirement plans, structuring business assets, Domestic Asset Protection Trusts (DAPTs), and Off-Shore Trusts. Finally, an analysis will be made as to whether an individual is a good candidate for asset protection planning.

STRATEGIES      

There are a number of strategies available to protect assets. Some are quite simple, and others are complex.

INSURANCE

The basic first step for asset protection is insurance. Basic insurance includes automobile, homeowner’s insurance, and life insurance. The purpose of auto insurance and homeowner’s insurance is obvious. Life insurance is critical to help protect assets in the hands of surviving family members. Life insurance proceeds are generally free from the claims of creditors. Every professional should have adequate malpractice insurance. The amount of the insurance will depend on the professional’s exposure to risk. If commercial real estate is owned, fire and casualty insurance, together with liability insurance, is important. For business owners or individuals serving on boards of directors of for-profit entities, and non-profits, it is essential to obtain officer’s and director’s liability insurance. Personal umbrella insurance is extremely inexpensive. A personal umbrella insurance policy supplements the liability limits on standard policies. The insurance company issuing the umbrella policy will have certain minimums for the underlying policies and will cover liability in excess of those limits. Business interruption insurance is available to provide operating monies while a business is not operating due to certain casualties.

TITLING OF ASSETS

Proper titling of assets can be a useful strategy in asset protection planning. Litigation-prone professionals or business persons may choose to title the bulk of their family assets in the name of their spouse. This may offer some creditor protection, but it could hinder estate planning. If a primary residence is owned as tenants-by-the entireties, a judgment creditor cannot enforce a lien against the debtor so long as both spouses are residing in the home. Assets can be titled in the names of children. The problem is if the children are subject to claims of their own creditors, the transferred assets are at risk.

RETIREMENT PLANS

ERISA plans include employer-sponsored 401ks and defined benefit and defined contribution plans. These include both pension plans and profit-sharing plans. ERISA plans provide protection against all types of creditors. It should be understood that while creditors cannot assert a claim against funds while they are in the retirement account, they can make a claim on any distributions. In New Jersey,[1] IRA accounts are protected against the claims of creditors. The funds are protected while they are in the account, and distributions from the account are also protected. Under the Federal Bankruptcy Act, federal bankruptcy provides complete protection if the IRA is a rollover from a qualified ERISA plan. Under federal bankruptcy law the protection is limited to $1,000,000 if the IRA is not a rollover from an ERISA plan. An inherited IRA is not protected under federal bankruptcy law.[2]

ASSETS USED IN PROFESSION OR BUSINESS

There are a number of business entities that provide protection of business assets from claims of creditors. These include corporations, LLCs and LLPs. In utilizing these entities, it is often useful to establish separate entities for separate purposes. A corporation, properly operated, should protect business assets from claims of business creditors. For all intents and purposes, an LLC offers essentially the same creditor protection as a corporation with the same trap for the unwary (i.e., personal guarantees). Limited Liability Partnerships offer significant protection for limited partners. However, the general partner is exposed to claims of creditors. A general partner has unlimited liability for acts of the partnership. A solution to this problem is to form a corporation to serve as general partner. A good strategy is often to use separate business entities to own separate business assets. For example, a corporation might be formed to operate a business while a separate LLC might own business equipment and another LLC might own business real estate. Equipment and real estate could be leased to the corporation operating the business. The claim against one entity may not jeopardize assets owned by separate entities. It is critical in operating separate entities that funds not be mixed between or among those entities. Funds generated by the operating company must remain in the operating company. Funds generated by the leasing companies must remain separate in the leasing companies. If the operating company runs low on money, it should not borrow from the leasing companies.

Next month’s column will discuss Domestic Asset Protection Trusts and Off-Shore Trusts.

[1] N.J.S.A. 25:2-1.

[2] Clark v. Rameker, 573 U.S. ____ (2014).

Unfortunately, many personal injury settlements come undone when liens have been discovered after the settlement has been agreed upon.  Sometimes this is fixable, but often it is not.  Here are some of the common liens that must be addressed in typical personal injury settlements:

Medicaid Liens

As a condition of Medicaid eligibility, a Medicaid applicant is required to assign to the state any rights to payment of medical care from a third party.[1]  If the individual fails to pursue the claim, the state has the option of pursuing it.  In New Jersey, the Attorney General is responsible to enforce any rights against third parties for recovery of liens.[2]  When an individual brings an action for damages against a third party, written notice must be given to the Director of the Division of Medical Assistance and Health Services.  In addition, the Division must be notified of any recovery from a third party.[3]  The Medicaid lien applies only to medical assistance related to the injury and the lien applies only to payments made from the date of the injury to the date of the settlement.  The Medicaid lien can be reduced for procurement costs, which include the attorneys’ fees and costs of the case.[4]  In addition, an Ahlborn reduction may be possible, if the case settles for less than the true value of the claim.[5]

Medicare

The Medicare Secondary Payer Act (MSP) governs all claims for recovery of Medicare payments for accidents or injuries.[6]  Under the MSP the federal government has a statutory lien.  In addition to the lien against the settlement, CMS has a right of recovery from parties that received third party payments.  These include:  the beneficiary, provider, supplier, physician, attorney, state agency, or primary insurer that has received a third party payment.[7]

Medicare Advantage Plans and Medicare Part D

Medicare Advantage Plans, also called Medicare Part C, are Medicare-equivalent programs operated by private insurance companies.  There had been an issue as to whether Medicare Part C and D Plans have the same rights of reimbursement that Traditional Medicare has, or whether their right is billed out by contract.  The United State Supreme Court denied cert to a case in which the 3rd Circuit U.S. Court of Appeals ruled that the administrator of a Medicare Part C Plan was entitled to the same rights Medicare itself would have had an action against the makers of a Diabetes drug, Avandia.[8]

ERISA

An ERISA Plan can recover for damages recovered from third parties where the plan language clearly establishes such a right.  The plan’s right of recovery must be against a specific identifiable fund, such as a tort recovery, as opposed to a claim against the general assets of the individual.  It is important to check the plan to determine if the plan has a right of recovery.  Generally, ERISA preempts state law.[9]  However, ERISA does not exempt or relieve any person from complying with any law of any state that relates to insurance, banking, or securities.[10]  Therefore, any self-insured employee benefit plan is covered under ERISA and enjoys federal preemption, but an insurance company insuring such a plan does not.  Such insurance companies are regulated by state law and are subject to the state’s laws governing subrogation reimbursement.[11]

Federal Employee Health Benefit Act

The Federal Employee Health Benefit Act (FEHBA) provides group health insurance for federal employees.[12]  FEHBA provides a preemption provision whereby the terms of the insurance contracts issued by private carriers preempts state and local law.[13]  Most plans contain subrogation or reimbursement provisions.

U.S. Medical Care Recovery Act

The United States Medical Care Recovery Act (USMCRA) provides coverage to military persons or dependents who sustain a personal injury or are treated at a military or veterans facility or for which treatment was paid for by government-sponsored insurance program such as TRICARE.[14] USMCRA prohibits the payments of attorneys’ fees and costs for prosecuting the government claim.

Welfare & TANF Liens

In New Jersey, there is a lien against real and personal property of a person who has been assisted by or receiving support from any municipality or county.  This is true whether a person has been in a county facility or at home.[15]  Temporary Assistance for Needy Families (TANF) is a welfare program.

Mental Health Liens

In New Jersey, a person with a mental illness who is over age 18 and is being treated in a state psychiatric hospital shall be liable for the full cost of his treatment, maintenance, and all necessary related expenses.[16]

Victims of Crime Compensation

In New Jersey, certain victims of crime are entitled to compensation under the Criminal Injuries Compensation Act of 1971.[17]  The state has a right of subrogation against persons responsible for personal injury or death and a lien after entry of judgment.[18]

State Workers’ Compensation Claims

When there is a state Workers’ Compensation (WC) claim and also a third party liability case, and the third party liability case settles, there is a WC lien against the third-party liability proceeds.[19]

Federal Employee Compensation Act

The Federal Employee Compensation Act (FECA) is the federal equivalent of a state Workers’ Compensation law.[20]  The United States has a statutory lien for recovery against third party liability cases.[21]

Hospital Liens

Generally, every hospital, nursing home, licensed physician, or dentist has a lien for services rendered by way of treatment, care, or maintenance to any person who has sustained personal injuries in an accident as a result of negligence or alleged negligence of any other person.[22]

Veterans Administration Claims

The federal Veterans Administration (VA) has a right of recovery against a third party when the VA pays for medical treatment on behalf of the Veteran or his family.[23]  There is a lien on any recovery the Veteran or his family subsequently receives from a third party from the same treatment.  The right of recovery applies only to non-service connected disabilities.[24]

Derivative Claims

Liens are generally enforceable against the settlement of an injured party on whose behalf benefits are paid, but it is unlikely enforceable against derivative claims of others related to the incident.[25]

The portion of ERISA which he is basing his thesis states “”It shall be unlawful for any person to discharge, fine, suspend, expel, discipline or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan … or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan … ”

Here’s the problem with this argument – there has to be a plan in place which the employee would otherwise have a right to participate in.

The fact is, employers will be reducing hours to avoid a penalty assessed by the government. There is no obligation for the employer to setup a plan so ERISA does not apply to an employer who does not offer a benefit plan and is seeking to legally avoid the penalties of the ACA.

The ACA does not require employers to setup a health plan, it simply penalizes them for not doing so.

Reducing employee hours to reduce or eliminate government penalties does not infringe on an employee’s right to participate in a plan because there is no plan.

At the very least, this interpretation of ERISA is a stretch. A stretch that will make a lot of money for attorneys at the very least.

This does not mean that there won’t be an attempt to enforce this interpretation of ERISA but if you or your client does not offer a plan, applying ERISA will be a hard argument for the government to make.