Why You Should Include a “No-1099” Provision in Settlement Agreements

At the recent annual conference of the Society of Settlement Planners, one of the presenters suggested adding a provision regarding Form 1099s to settlement agreements.

Defendants or their insurers will often send plaintiffs a 1099, even though the underlying claim is for personal physical injuries (and therefore should not be sent a 1099).  Your client (or you) then has to contact the defendant and rely on their cooperation and good will to remedy this problem.

However, rather than having to rely on the cooperation of the defense, plaintiff attorneys should include a provision in the settlement agreement stating that the defendant agrees not to send a 1099 to the plaintiff.

An example of such a provision is as follows:

“All sums set forth above constitute compensatory damages paid on account of personal physical injuries or physical sickness, arising from an occurrence within the meaning of Section 104(a)(2) of the Internal Revenue Code of 1986, as amended. Therefore, neither the defendant nor any of its insurers shall send an IRS Form 1099 to the plaintiff for any amount paid under this agreement.”

If you include a “no-1099” provision and the defense sends a 1099 to your client, rather than having to rely on the cooperation of the defense to fix the problem, you can indicate that the defense acted in violation of the settlement agreement.  This should make it easier to remedy an incorrectly sent 1099.

It should be noted that the above provision complies with the instructions for Form 1099-MISC, which state the following: “…[D]o not report damages (other than punitive damages) … [r]eceived on account of personal physical injuries or physical sickness.”1  Similar language is also found in the IRS Publication “Lawsuits, Awards, and Settlements Audit Techniques Guide” found on the IRS website.[2]

[1] https://www.irs.gov/instructions/i1099mec
[2] https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf