Workers Compensation and

Medicare Update

January 16, 2015

David J. Korch, AIC, SCLA, CMSP

VP of Workers Compensation & Medicare Practices

Workers Compensaon Selements & Medicare set asides in bankruptcy

Volume 8 Issue 1

One issue that is rarely addressed during settlement discussions is the handling of a
Medicare set aside account in the event the Medicare beneficiary files bankruptcy. This
was recently addressed in the United States Bankruptcy Court in the matter of Jesus
Arellano (Debtor) CHAPTER 13, CASE NO. 1:14-Bk-00990 MDF, UNITED STATES
BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA, 2015
Bankr. LEXIS 9.
Mr. Arellano suffered a broken hip during the course of his employment in 2010. He filed a
disability claim with the Workers Compensation commission in the state of Maryland and
in December 2011 entered into a settlement agreement in which he received a lump sum
payment of $225,000. In addition he received $72,741 to be placed into a Medicare set
aside account. In the settlement he acknowledged the payment and the fact that Medicare
would be secondary to his Medicare set aside account. He received the settlement funds in
January 2012 and placed them into bank accounts.
As typically occurs when an individual receives a large lump sum of money, numerous
purchases occurred. In this case, he purchased a 2005 Ford F-150 for $17,000, a residence
in York, PA in the amount of $85,000, and a second residence in York, PA in the amount of
$86,000. He then sold the second property to his brother on installment payments. The
brother was obligated to make payments of $1200 per month with an interest rate of 5.5%
through 2020.
He filed for Chapter 7 on March 8, 2014 listing a schedule of exempt items which included
the Ford F-150, both properties and the balance of funds in the checking accounts from his
settlement. All were claimed to be exempt under the bankruptcy code. He did, however,
fail to list the installment agreement.
The trustee in the bankruptcy (Steven M Carr) filed objections to the exceptions indicating
that the law did not allow the debtor to exempt property that were proceeds of the workers
compensation claim. A hearing was held in September 2014 listing the following issues:
1. whether funds or property traceable to the proceeds of a lump sum Workers
Compensation settlement received pre-petition may be claimed as exempt,
2. if the funds and property may be exempted, whether they are necessary for the
support of the debtor and his dependents.

EPS Settlements Group Corporate Office:

Toll Free: 800-354-4098

5613 DTC Parkway, Suite 600,

CA License #0B97963

Greenwood Village, Colorado 80111

www.epssg.com

Workers Compensation and Medicare Update

In reviewing the matter the court noted that under section 522(d)(11)(E)(b)(2) payment
in compensation of loss of future earnings of the debtor or an individual of whom the
debtor is or was a dependent to the extent reasonably necessary for the support of the
debtor and any dependent of the debtor is exempt.
The judge further indicated that payments under an annuity or similar plan based on illness, disability, death, age or length of service are also exempt.
In a similar case the court had concluded that workers compensation awards may be
exempted under section 522(d)(11) if the award is traceable to a payment that is intended
to compensate for the loss of future earnings and traceable to a payment intended for the
support of the debtor or his dependents.
Proceeds from a workers
compensation settlement,
designated for future
income (indemnity),
annuities (Structured
Settlement Annuities),
items traceable to
indemnity proceeds and
funds set aside for a
Medicare Set aside as
defined by Medicare are
not subject to the creditors
in bankruptcy.

The court then addressed the Medicare set aside account. The court indicated that the
lump sum for the Medicare set-aside was not exempt but not subject to the administration of the trustee because it is not property of the bankruptcy estate. The court further
indicated property (MSA) in which the debtor holds only legal title is excluded from the
bankruptcy case. Also exempt are trusts. To create an express trust the following must
exist: 1) a subject-matter; 2) a settlor, competent to create a trust; 3) a person capable of
holding the subject-matter as trustee; and 4) a beneficiary, for whose benefit the property
is being held.
The court cited the Medicare secondary payer statute and also indicated that Maryland
law governs because the agreement of final compromise and settlement was entered into
in the State of Maryland.
The bankruptcy judge ruled that the approved settlement in Maryland established a trust
for the benefit of medical providers ("Though ostensibly belonging to the debtor, medical payments are actually not the property of the debtor, but are held in trust for another.") based on future need of medical care estimated through the Medicare set aside.
The chief bankruptcy judge, Mary D France, ruled that all exemptions listed by the debtor were exempt from the bankruptcy trustee. The Medicare set aside could not be
touched in the bankruptcy nor the property purchased by the debtor as exempt. The only
item that could not be exempted was the interest earned on the installment sale; however,
the judge ruled that this modest amount had a negligible impact on the debtors income.
As pointed out by the courts, proceeds from a workers compensation settlement, designated for future income (indemnity), annuities (Structured Settlement Annuities), property and items traceable to the indemnity proceeds and funds set aside for a Medicare as
defined by the Centers for Medicare and Medicaid Services are not countable assets and
excluded from the bankruptcy creditors.

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EPS Settlements Group Corporate Office:

Toll Free: 800-354-4098

5613 DTC Parkway, Suite 600,

CA License #0B97963

Greenwood Village, Colorado 80111

www.epssg.com