HermnDaMonstaJohson

also, if any portion of the personal injury settlement was for confidentiality, that portion would be taxable as well.

I have handled a case similar to this before.

Assuming the company was paying out an amount greater than the monthly social security payments, the insurance company is entitled to receive the retroactive lump-sum payment. Your friend should have forwarded that payment to his/her insurance company.

If he no longer has the money or refuses to pay it, then the insurance company can recoup it by withholding present and future disability payments.

If ERISA governs your friend's insurance plan, which it probably does, it is unlikely that the insurance company will send collectors after your friend or file a lawsuit. As far as I could tell, ERISA does not provide the insurance company with any method of recovery other than witholding. Several Courts have upheld insurance companies' right to withhold payments to recoup unreturned retoactive lump sums received by the beneficiary.

The best I was able to do for my client was to negotiate a payment plan whereby the insurance company only withheld half of his monthly long-term disability payment. I made sure my client knew that he needed to meet with a tax advisor to amend his prior tax returns to account for the tax issues you raised.

As to your situation, I would recommend recalculating the amount the insurance company is seeking to reflect any deductions, e.g. attorney's fees paid in getting the retroactive payment. Then your friend should call the insurance company and attempt to negotiate a settlement that is amenable to his/her financial situation.

However, your friend needs to retain a lawyer or, if he/she cannot afford to pay, should contact a volunteer lawyer organization to review the specifics of his/her case.