How Shifts in Interest Rates are Affecting the Value of Workers’ Compensation Death Claims
Interest rates affect many aspects of our lives, from the housing market, to credit cards, to student loan debt. One area that is often over-looked, is how shifts in rates affect workers’ compensation claims. Death claims in North Carolina represent the sole instance when the Industrial Commission determines the discount rate to be used in determining present values. The North Carolina Industrial Commission Rules tie computing the present value of un-accrued compensation payments to the Internal Revenue Services’ Applicable Federal Rate, which is set monthly.
After returning to work on January 2, 2019, you were greeted by a new tragic claim on your desk. Unfortunately, Debby Decedent sustained a compensable workplace injury on December 31, 2018, which resulted in her death. There is no question that her tragic death is compensable, you simply want to determine how to properly compensate her beneficiaries.
The North Carolina Workers’ Compensation Act provides that in the case of a compensable death, the Decedent’s legal beneficiaries are entitled to 500 weeks of benefits, burial expenses not to exceed $10,000.00, and medical expenses.
There are three overarching questions that will need to be considered in order to properly resolve Debby’s claim. It would be prudent to involve an attorney at this point.
The first question is the same as in any other claim, what was Debby’s average weekly wage and corresponding compensation rate?
After interviewing her employer and analyzing a Form 22, it is determined that Debby earned $2,000.00 per week during 2018. This would yield a weekly compensation rate of $1,333.33, but the maximum weekly compensation rate for 2018 was $992.00.
The second question is specific to death claims: who are Debby’s beneficiaries? The type of beneficiaries will dictate how the 500 weeks of benefits are paid.
In North Carolina, potential beneficiaries are divided into people who are “wholly dependent”, “partially dependent”, and “next of kin.” Next of kin is defined as including “only child, father, mother, brother or sister of the deceased employee, including adult children or adult brothers or adult sisters of the deceased.”
After interviewing the Employer, and people close to Debby, serving discovery on representatives, collecting affidavits, and potentially having a dependency hearing before the Industrial Commission, it is determined that no one was wholly, or partially dependent, and only her sister qualified as a “next of kin.” Therefore, the 500 weeks of indemnity benefits will be paid in a lump sum to Debby’s sister. Debby’s sister will be entitled to the full amount of benefits that have accrued at the time of payment, and the present value of future benefits.
At this point, a third question arises: how is the present value of future benefits calculated?
The North Carolina Workers’ Compensation Rules provide that the interest rate to be used in calculating the present value shall be the Internal Revenue Services’ Applicable Federal Rate that is used to determine the present value of an annuity. This rate is found in the Index of Applicable Federal Rate Rulings, and is set each month.
The applicable rate has been steadily decreasing over the past year. The lower the rate, the higher the total payout is going to be.
January 2019: 3.4%
February 2019: 3.2%
March 2019: 3.2%
April 2019: 3.0%
May 2019: 2.8%
June 2019: 2.8%
July 2019: 2.6%
August 2019: 2.2%
September 2019: 2.2%
October 2019: 1.8%
November 2019: 2.0%
December 2019: 2.0%
January 2020: 2.0%
If Debby’s claim was to somehow be resolved within five weeks of her death, in February 2019 (this is highly unlikely), the payout would be:
5 Weeks of accrued TTD: $4,960.00
PV of 495 weeks of Un-accrued TTD using 3.2% rate: $423,188.64
If Debby’s claim resolved in 26 weeks, in July 2019, the payout would be:
26 Weeks of accrued TTD: $25,792.00
PV of 474 weeks of Un-accrued TTD using a 2.6% rate: $418,548.57
If Debby’s claim resolved in 40 weeks, in October 2019, the payout would be:
40 Weeks of accrued TTD: $39,680.00
PV of 460 Weeks of Un-accrued TTD using a 1.8% rate: $421,776.48
If Debby’s claim resolved in 52 weeks, in January 2020, the payout would be:
52 Weeks of accrued TTD: $51,584.00
PV of 448 Weeks of Un-accrued TTD using a 2.0% rate: $408,163.59
As you can see, the interest rate has a drastic effect on the present value of future payments. 460 weeks of payments discounted at a rate of 1.8% in October 2019 is worth more than 474 weeks of payments discounted at a 2.6% rate in July 2019. In this scenario, the claim is worth over $30,000.00 more in October 2019, than it was in February 2019. Debby’s scenario is on the high end of the effect given her maximum compensation rate, but shifts in interest rates have noticeable effects on the value of all death claims.