You have a horrific accident and are looking at a life of extreme medical care. The accident was caused by another person (drunk truck driver). You get a multi-million dollar award. Does the state that you live in get a share?
First, personal injury awards are generally free from income tax. Section 104 of the tax code excludes a personal injury award from income tax, so long it is for physical injury, physical sickness, emotional distress arising from these or for medical expenses.
So, it if's tax free, how does the state get involved? Because sometimes people who are injured don' t have money to pay for their medical care during the lawsuit. If so, Medicaid in that state may be forwarding funds for the person's care. The state then files a Medicaid Lien against the award to recover its assets.
The United States Supreme Court just handed down a new ruling about what Medicaid can lien against a settlement. Wos v. E.M.A. (U.S., No. 12-98, March 20, 2013). The issue in this case was that when the parties settled the case, they did not allocate any part of the award to medical expenses. Per elderlawanswers.com:
Under North Carolina law, the state is entitled to a lien on a Medicaid recipient's tort recovery for the lesser of the total cost of medical services provided or one-third of the recovery. Emily Armstrong settled a medical malpractice suit for $2.8 million against the doctor who delivered her -- far less than the cost of her future care. The parties did not stipulate what portion of the settlement represented payment for past or future medical expenses. The state, having already spent close to $2 million for Emily's care, asserted its lien for one-third of the settlement.
Emily objected, claiming that the mandatory lien on one-third of the settlement violated the Supreme Court's decision in Arkansas Department of Health and Human Services, et al. v. Ahlborn that limited the state's recovery from a Medicaid recipient to the funds she received as compensation for medical expenses.
The US Supreme Court agreed with Emily. The Court found that "[a]n irrebuttable, one-size-fits-all statutory presumption is incompatible with the Medicaid Act's clear mandate that a State may not demand any portion of a beneficiary's tort recovery except the share that is attributable to medical expenses."
What does this all mean in the scope of personal injury settlements? First, the state can only assert a lien against the portion of the award designated towards medical expenses. Before you get too happy and think "OK- we just won't allocate any of the award to medical expenses", remember that that the state is there to protect the taxpayers' dollars. If there is no allocation of medical expenses in the settlement, or by a judge or jury, the Court noted that the State and award beneficiary could submit the matter to a court for decision.
Smarter move? Allocate appropriate medical expenses to satisfy the lien so that special needs planning can be done with the balance of the award.