An indexed structured-settlement annuity still counts as a section 130 qualified funding asset

Plain-English summary

When someone is injured and settles for periodic payments over time (a
"structured settlement"), the defendant usually hands off its payment
obligation to an assignment company, which buys an annuity to fund the
payments. Section 130 lets the assignment company leave the lump sum it
receives out of its income, up to the annuity's cost, as long as the deal is a
"qualified assignment" backed by a "qualified funding asset." Here a group of
affiliated insurers proposed to fund the payments with an indexed annuity: the
annual payments can rise or fall with a market index, but never drop below a
guaranteed floor set when the contract is issued. The companies asked whether
payments that move with an index are still "fixed and determinable as to amount
and time of payment" under Section 130(c)(2)(A), and whether the annuity still
qualifies as a funding asset under Section 130(d). The IRS ruled yes to both,
because the index supplies an objective formula and payments can never fall
below the floor. This matters because it lets structured-settlement providers
offer injury claimants inflation-protected, market-linked payments without
losing the Section 130 tax treatment. The IRS did not rule on whether the
payments are tax-free to the claimant.

Ruling snapshot

• Question: Are indexed, fluctuating annuity payments still "fixed and determinable" under § 130(c)(2)(A), and does the annuity still qualify as a § 130(d) qualified funding asset?
• Outcome: Approved (yes to both rulings)
• Key authorities: IRC § 130(c)(2)(A), § 130(d); IRC § 104(a)(2); IRC § 816(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202618005 Third Party Communication: None
Release Date: 5/1/2026 Date of Communication: Not Applicable
Index Number: 130.00-00, 130.01-00,
130.02-00 Person To Contact:
---------------------------, ID No. ---------------
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-------------------- Telephone Number:

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Refer Reply To:

                                                          CC:ITA:B05

                                                          PLR-112870-25

                                                          Date:
                                                          January 30, 2026

Legend:

Parent Company = -------------------------------------------------------------------------
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Insurance Company = -------------------------------------------------------------------------
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Annuity Company = -------------------------------------------------------------------------
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Assignment Company = -------------------------------------------------------------------------
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State 1 = -------------
State 2 = ------------
State 3 = -------------
Claimant = -----------------------------------------------
Date 1 = ---------------------
Date 2 = ------------------------
Date 3 = -------------------------
Amount A = -----------------------------
Amount B = --
Amount C = -------------------------------
Variable A = ---------------------------------------------
Variable B = --------------------------
Variable C = -----------------------------
Annuity Contract = -------------------------------------------------------------------------
-----------------------------------------------
Index = --------------------

Dear ------------------:

This is in response to your Date 1 ruling request, and supplemental submission dated
Date 2, submitted on behalf of a group of affiliated corporations (collectively, "The
Companies") regarding the application of § 130 of the Internal Revenue Code ("Code")
to the transaction described below.

                                    FACTS

The Companies represent the facts as follows:

Parent Company, organized and operated under the laws of State 1, is treated as a
corporation for federal income tax purposes. Parent Company files a consolidated
federal income tax return with its affiliated corporations on an accrual accounting,
calendar-year basis.

Insurance Company and Annuity Company are stock life insurance companies
organized and operated under the laws of State 1 and State 2, respectively. Both
qualify as life insurance companies under § 816(a) and join in the filing of a
consolidated federal income tax return with Parent Company. Insurance Company and
Annuity Company issue structured settlement annuity contracts in states where they
meet state licensing requirements. For purposes of the discussion below "Carrier"
refers to either Insurance Company or Annuity Company.

Assignment Company is a corporation domiciled in State 3. Assignment Company is an
indirect, wholly owned subsidiary of Parent and joins in the filing of a consolidated
federal income tax return with Parent Company.

Assignment Company conducts a business of assuming liabilities from third-party
defendants to make periodic payments to third-party claimants pursuant to structured
settlement agreements between such parties. In connection with that business,
Assignment Company purchases structured settlement annuity contracts from Carrier
as "qualified funding assets" to support Assignment Company's obligations to make
periodic payments to third-party claimants.

Claimant is an individual pursuing a claim against a defendant relating to a motor
vehicle accident. On Date 3, Claimant was riding a bicycle when he was struck by a
garbage truck. Claimant is entitled to damages for personal injuries as a result of the
incident. Claimant is negotiating the terms of a structured settlement agreement
("settlement agreement") for such damages and is considering incorporating a
requirement in that settlement for the defendant to make periodic payments to Claimant
in the manner described in a single premium structured settlement indexed annuity
contract (Annuity Contract). Specifically, Claimant is considering a settlement
agreement that will provide a 20-year payout preceded by a 10-year deferral period.

The proposed settlement agreement will obligate the defendant to make periodic
payments to Claimant that are excludable from Claimant's gross income pursuant to
§ 104(a)(1) or (2). The settlement agreement will provide that the dollar amount of each
periodic payment must be determined as described in the Annuity Contract.

Pursuant to the proposed settlement agreement, the defendant will assign its payment
liabilities thereunder to Assignment Company and will pay Assignment Company a lump
sum for accepting the assignment. Assignment Company will deduct a fee from that
amount and use 100 percent of the remaining sum (Amount C) to purchase the Annuity
Contract from Carrier as a qualified funding asset.

The Annuity Contract provides for periodic payments made annually for the life of a
claimant, a specified period of years, or for the claimant's life with a specified number of
years guaranteed. The dollar amount of the annual payments may increase or
decrease according to a specified formula that references the performance of a market
index (the Index).1

Regardless of the performance of the Index, however, the payments will never be less
than a minimum dollar amount that is guaranteed when the Annuity Contract is issued.
The Annuity Contract provides a guaranteed floor, defined as Amount A, for the periodic
payments along with the potential for higher payments based on the performance of the
Index. Amount A is determined when Carrier issues the Annuity Contract and is based
on Amount C and other actuarial factors. Increases, if any, in the Annuity Contract's
annual payments over and above Amount A are determined using Variable C, which is
calculated with reference to the formula included in the Annuity Contract. Each year,
Variable C is multiplied by Amount A to determine that year's payment. The Annuity
Contract's governing terms provide that Variable C will never be less than Amount B, so
that the periodic payment in a year will never be less than Amount A. This is intended
to provide Claimant a steady stream of income he can count on receiving every year,
without having to forgo access to market-based returns that could increase the
payments and thereby help offset the potentially erosive effects that inflation could have
on the purchasing power of Claimant's income stream.

The Annuity Contract's formula that determines the amount of each annual payment will
provide the following effects:

•   The annual payment will increase relative to the prior year's payment if the rate
    of return on the Index after certain adjustments (Variable A) exceeds a threshold
    rate determined under the formula (Variable B); and

•   The annual payment will decrease relative to the prior year's payment (but not
    below Amount A) if Variable A does not at least equal Variable B.

1 If the Index is discontinued or if the calculation of the Index is substantially changed, Companies are
authorized to substitute an alternative index and will notify the affected person.

The mechanics of the formula in the Annuity Contract are similar to those under other
indexed annuity contracts, which take into account the positive, but not negative, returns
on a specified index, subject to adjustments known as "participation rates" and "cap
rates". The Annuity Contract's formula includes those adjustment features and
incorporates Variable B, which may be unique to the Contract.

The Variable B formula is aimed at providing a guaranteed floor for periodic payments
with the potential for increases based on the positive performance of an index and is
designed to accomplish this by allocating a portion of Variable A from previous years to
increase funds Carrier has available to purchase hedging instruments. Variable B is
intended to result in higher participation rates and higher cap rates when determining
potential increases in the periodic payments based on the performance of the Index.
Thus, when the Index performs well, it is anticipated that the periodic payments made
pursuant to the Annuity Contract will be more likely to increase at a higher rate than
other indexed annuities.

The Annuity Contract may include a deferral period, meaning the periodic payments
would not start until the end of a specified number of months or years after such
contract is issued. In that case, the calculation of Amount A will include an additional
interest component that takes the deferral period into account.

If there is no deferral period before the payments begin, Variable C for the initial
periodic payment will equal Amount B, so that the first payment will equal Amount A.
Each year thereafter, Variable C will be determined using the formula and multiplied by
Amount A to calculate that year's payment, subject to the guarantee that Variable C will
never be less than Amount B and therefore the annual payment will never be less than
Amount A.

If there is a deferral period before the payments begin, the same process will be
followed to determine Variable C each year, but the payments will not actually start until
the end of the deferral period. This means the first annual payment could be higher (but
never lower) than Amount A.

The Companies also make the following representations:

1. The Annuity Contract will be treated as a structured settlement annuity contract
   under applicable state law.

2. Assignment Company will assume a liability to make periodic payments as
   damages on account of personal injury or sickness (in a case involving physical
   injury or physical sickness) from a person who is a party to the settlement
   agreement.

3. Claimant will be unable to accelerate, defer, increase, or decrease the periodic
   payments paid under the Annuity Contract or the settlement agreement.

4. Assignment Company's obligation to Claimant will be no greater than the
   defendant's obligation under the settlement agreement.

5. The periodic payments made under the settlement agreement will be excludable
   from Claimant's gross income under § 104(a)(2).

6. The Annuity Contract will be issued by Carrier to fund the periodic payments to
   Claimant pursuant to an assignment of a liability to make periodic payments as
   damages on account of personal injury or sickness (in a case involving physical
   injury or physical sickness).

7. The settlement agreement will provide that the dollar amount of each periodic
   payment and the duration of the payments must be determined as described in
   the Annuity Contract.

8. Assignment Company will designate the Annuity Contract as being taken into
   account under § 130 with respect to the assignment of liability.

9. Assignment Company will purchase the Annuity Contract from Carrier not more
   than 60 days before or after the date of the assignment of liability to make
   periodic payments.

                           REQUESTED RULINGS
   

The Companies have requested the following rulings:

1. The periodic payments that will be made under the Annuity Contract are "fixed
   and determinable as to amount and time of payment" within the meaning of
   § 130(c)(2)(A).

2. The Annuity Contract will not fail to be a "qualified funding asset" within the
   meaning of § 130(d) solely by reason of the periodic payments fluctuating in
   amount as described in the Companies' ruling request and Annuity Contract.

                            LAW AND ANALYSIS
   

Section 104(a)(2) of the Code generally excludes from gross income the amount of any
damages received (whether by suit or agreement and whether as lump sums or as
periodic payments) on account of personal physical injury or physical sickness.

Section 130(a) provides that any amount a party receives for agreeing to a qualified
assignment is not included in gross income to the extent that such amount does not
exceed the aggregate cost of any qualified funding assets.

Section 130(c) defines a "qualified assignment" as any assignment of liability to make
periodic payments as damages (whether by suit or agreement) on account of personal
injury or sickness (in a case involving physical injury or physical sickness) provided that,
among other conditions: such periodic payments are fixed and determinable as to the
amount and time of payment.

Section 130(d) provides the requirements an annuity must meet to qualify as a "qualified
funding asset," including the requirements that (1) such annuity contract or obligation is
used by the assignee to fund periodic payments under any qualified assignment; (2) the
periods of the payments under the annuity contract or obligation are reasonably related
to the periodic payments under the qualified assignment; and (3) the amount of any
such payment under the contract or obligation does not exceed the periodic payment to
which it relates.

Periodic payments can be fixed and determinable as to the amount and time of payment
even if the payments are calculated pursuant to a formula based on the performance of
a stock index or a mutual fund portfolio. The terms of the Annuity Contract include the
Index, which provides an objective formula for computing the amount of each periodic
payment that will be made to Claimant. Further, each payment will never be less than
Amount A.

Consequently, we conclude that for purposes § 130(c)(2)(A), the periodic payments that
will be made pursuant to the Annuity Contract are fixed and determinable as to amount
and time of payment. Moreover, the Annuity Contract will not fail to be a qualified
funding asset within the meaning of § 130(d) solely by reason of the provisions
authorizing indexed payments that may fluctuate in amount and the potential increase in
the periodic payments.

                                    RULINGS

Accordingly, based strictly on the information submitted and the representations made,
our office concludes:

1. The periodic payments that will be made under the Annuity Contract are fixed
   and determinable as to amount and time of payment within the meaning of
   § 130(c)(2)(A).

2. The Annuity Contract will not fail to be a qualified funding asset within the
   meaning of § 130(d) solely by reason of the provisions for indexed benefits or
   because the periodic payments may fluctuate in amount.

                                   CAVEATS
   

Except as expressly provided in rulings 1 and 2 above, no opinion is expressed or
implied concerning the tax consequences of any aspect of any transaction or item
discussed or referenced in this letter. Specifically, no ruling on the taxability of the
periodic payments to Claimant has been requested, and therefore no ruling is being
issued to Claimant under § 104(a)(2) or any other provision of the Code. This ruling is
directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that
it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the Companies and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                                        Sincerely.

                                                        Gerald Semasek
                                                        Senior Technician Reviewer, Branch 5
                                                        Office of Associate Chief Counsel
                                                        (Income Tax and Accounting)

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