by John Darer® CLU ChFC MSSC CeFT® RSP CLTC
Updated June 11, 2026
Employment Structured Settlements
Employment structured settlements are financial arrangements that allow compensation from an employment dispute — such as wrongful termination, discrimination, harassment, retaliation, or wage claims — to be paid out over time instead of as one large lump sum. Rather than receiving the entire settlement immediately, the employee (or former employee) receives regular, predetermined payments, often monthly or annually, for a set number of years or even for life. This approach is increasingly popular in employment law cases because it provides both financial predictability and significant tax benefits under current IRS rules.
MetLife NQA-Flex plans expand the Employment Structured Settlement Plan Design Opportunities to Deferred Lump Sums and Deferred Income start sates to more efficiently fund items such as pension loss differential.
NQA-Flex: Flexibility in Non-Qualified Assignments – Structured Settlements 4Real®Blog 2026 April 1, 2026
Important: Allocating Wage Loss vs. Non-Wage Loss Claims
One of the most critical — and often overlooked — aspects of an employment structured settlement is the proper allocation of the settlement between different types of claims.In most employment cases, the total settlement includes two main categories:
- Wage Loss Claims (Taxable)
This includes back pay, front pay, lost wages, benefits, and other compensation that replaces what the employee would have earned. These amounts are generally taxable as ordinary income. - Non-Wage Loss Claims (Potentially Tax-Free)
This covers emotional distress, pain and suffering, discrimination, harassment, retaliation, and sometimes punitive damages. Under current tax law, properly allocated non-physical injury emotional distress damages can often be received tax-free.
Why Allocation Matters
If the settlement agreement does not clearly specify how much of the total amount is being paid for wage loss versus non-wage loss, the IRS may treat the entire settlement as taxable wages. This can result in a significantly higher tax bill and reduce the effectiveness of a structured settlement.A well-drafted allocation:
- Maximizes the tax-free portion of the settlement
- Allows more of the settlement to be structured efficiently
- Helps the structured settlement broker design the best payment plan
- Provides stronger protection if the IRS ever reviews the agreement
Best Practice:
Always have both the employment attorney and a qualified structured settlement consultant involved early in the process. They can work together to negotiate a clear, reasonable allocation that is acceptable to all parties and compliant with IRS rules.
