Class Action Settlement Payment Methods: Options and Considerations

Introduction

When class action settlements are finalized, eligible claimants often have multiple options for how they receive their compensation. While paper checks were once the standard, settlement administrators now typically offer a range of payment methods reflecting our increasingly digital economy. Each payment option comes with its own advantages and potential drawbacks that consumers should understand before making their selection.

This guide explores the most common settlement payment methods currently available, including traditional checks, digital payments, and alternative compensation forms like prepaid cards and store credits. We'll examine the pros and cons of each option and discuss how your payment choice might affect the overall value you receive from a settlement. This information will help you make informed decisions about how to collect your settlement payments effectively.

Traditional Check Payments

Despite the rise of digital payment options, paper checks remain a common method for distributing class action settlement funds. Here's what you should know about receiving payments by check:

• Accessibility: Checks work for everyone, regardless of whether they have bank accounts, digital payment accounts, or internet access.

• No fees: Unlike some digital payment methods, receiving a settlement check typically doesn't involve processing fees for the recipient (though there may be check-cashing fees depending on where you cash it).

• Paper trail: Physical checks provide tangible documentation of payment, which can be helpful for record-keeping and tax purposes.

• Familiarity: Many people, especially older consumers, are more comfortable with checks than with newer payment technologies.

• Delivery delays: Mail delivery can take days or weeks, and checks may get lost or stolen in transit.

• Limited validity period: Most settlement checks expire after 90-180 days. If you don't deposit or cash the check within this period, you may forfeit your payment.

• Check-cashing fees: If you don't have a bank account, you might pay significant fees at check-cashing services, which can reduce the value of your settlement.

• Address issues: If you've moved since filing your claim and haven't updated your address, your check might be sent to an outdated location.

Many settlement administrators are moving away from checks as the default payment method due to their high administrative costs and the uncashed check problem. In some settlements, as many as 20-30% of checks are never cashed, which complicates the final distribution of funds and increases administrative expenses.

Digital Payment Options

Digital payment methods are becoming increasingly popular for class action settlements due to their speed, convenience, and lower administrative costs. The most common digital options include:

• Pros: Funds are deposited directly into your bank account, typically within 1-3 business days after disbursement; no risk of lost checks; no expiration date concerns; and convenient for those with bank accounts.

• Cons: Requires sharing banking information with the settlement administrator; not accessible to the unbanked; occasional processing errors can cause delays.

• Pros: Fast delivery (often same-day); widely used service; can transfer to bank account or use for online purchases; and available to those without traditional bank accounts.

• Cons: Requires a PayPal account; potential account restrictions for large amounts; possible fees for transferring to bank accounts in some countries; and strict verification requirements for larger sums.

• Pros: Quick delivery; popular among younger consumers; easy transfers to linked bank accounts; and ability to use for purchases with Venmo-accepting merchants.

• Cons: Not as widely offered as PayPal for settlements; $299.99 weekly transfer limit for unverified accounts; and privacy concerns (default public transaction feed unless changed in settings).

• Pros: Immediate transfers directly to bank accounts; no fees; and growing integration with major banks.

• Cons: Both parties need Zelle accounts; limited adoption in settlement distributions so far; and no purchase protection features.

The common advantage of all digital payment methods is speed—you'll typically receive your payment much faster than with traditional checks. However, all require some level of technological comfort and access. Settlement administrators are increasingly offering multiple digital options to accommodate different preferences and needs.

Prepaid Cards and Store Credits

Some settlements offer compensation in the form of prepaid cards or store credits instead of (or as an alternative to) cash payments. These options warrant special consideration:

• Pros: Convenient for online or in-store purchases; no bank account required; less risk of loss compared to checks; and usable anywhere major credit cards are accepted (for network-branded cards like Visa or Mastercard).

• Cons: May have activation or inactivity fees; typically expire after 12-24 months; small remaining balances can be difficult to use up; and may have limitations on cash withdrawals.

• Pros: Often offered at a premium value compared to cash options (e.g., $15 store credit vs. $10 cash); convenient if you regularly shop with the defendant company; and sometimes transferable or giftable.

• Cons: Limited to purchases from specific retailers; typically cannot be converted to cash; may have expiration dates or usage restrictions; and value is diminished if you don't regularly use the service/product.

• Pros: Can provide significant discounts on future purchases; may have higher face value than cash alternatives; and good option if you intend to continue using the company's products despite the lawsuit.

• Cons: Forces continued patronage of the defendant company; often includes restrictions and exclusions; typically expires within a set timeframe; and questionable value if the lawsuit made you lose trust in the company.

These non-cash compensation methods are sometimes controversial in the class action world. Critics argue that they can benefit the defendant company by driving future business while providing less tangible value to class members. However, in some cases, these options might offer higher nominal value than the cash alternative, making them worth considering if you're already a regular customer of the business.

How Payment Choice Impacts Settlement Value

The payment method you select can significantly affect the actual value you receive from a settlement. Consider these factors when making your choice:

• Premium offers: Some settlements offer higher values for non-cash options to encourage their selection. For example, a settlement might offer $10 cash or a $15 store credit.

• Fee impact: Payment methods with associated fees (check-cashing services, wire transfers, etc.) reduce the net value of your settlement.

• Time value of money: Faster payment methods (like digital payments) provide value sooner, which can be advantageous compared to waiting weeks for a check.

• Unused value: Store credits, gift cards, and prepaid cards often go partially unused, with small remaining balances effectively forfeited.

• Expiration risk: Payment methods with expiration dates create a risk of receiving no value if you miss the window for use.

• Secondary benefits: Some payment methods may offer additional perks, such as purchase protection or rewards programs.

When choosing a payment method, consider your personal circumstances:

• Regular customers of the defendant company might benefit most from store credits or product vouchers with premium values.
• Those needing immediate funds should prioritize digital payment methods with the fastest processing times.
• Individuals without bank accounts might find prepaid cards more valuable than checks that would require paying check-cashing fees.
• People concerned about privacy might prefer checks despite their slower delivery, as they require less personal information.

Always calculate the real value of each option based on your specific situation and preferences. While a store credit might have a higher face value, its actual value to you depends on how likely you are to use it fully before it expires.

Tax Implications of Settlement Payments

The tax treatment of class action settlement payments varies depending on the nature of the settlement and the form of compensation. Understanding the basic tax implications can help you make informed decisions:

• Physical injury/sickness compensation: Settlements for physical injuries or physical sickness are generally not taxable under IRS rules.

• Emotional distress damages: Compensation for emotional distress is typically taxable unless it resulted from physical injury or sickness.

• Economic losses: Payments for lost wages, business profits, or interest are usually taxable as ordinary income.

• Property damage: Compensation that doesn't exceed your adjusted basis in the property is generally not taxable (it's considered a return of capital).

• Punitive damages: Almost always taxable, regardless of whether the underlying claim was for physical injury.

• Cash payments: The tax implications are the same regardless of whether you receive payment by check, direct deposit, or digital payment platform.

• Store credits and gift cards: Generally treated as taxable income at fair market value when received, if the underlying settlement payment would be taxable.

• Product vouchers and discounts: May be taxable at fair market value when received, though this can be a complex determination.

• 1099-MISC forms: For taxable settlements of $600 or more, you may receive a 1099-MISC form reporting the payment to both you and the IRS.

• Record keeping: Maintain documentation about the nature of the settlement and the form of payment for tax purposes, regardless of the payment method chosen.

• Small payments: Even if you don't receive a 1099 form (often the case with smaller settlements), taxable settlement income still legally needs to be reported on your tax return.

The tax treatment of class action settlements can be complex, and the information provided here is general in nature. For significant settlement amounts or situations where the tax treatment is unclear, consulting with a tax professional is advisable. Different payment methods generally don't change the fundamental tax treatment, but they can affect documentation and reporting.

Conclusion

The landscape of class action settlement payments has evolved significantly in recent years, offering consumers more choices than ever before. While traditional checks remain common, digital payment options, prepaid cards, and store credits now provide alternatives that may better suit your personal circumstances and preferences.

When selecting a payment method for a settlement, consider factors beyond just convenience—think about speed of receipt, potential fees, expiration dates, and whether premium values for non-cash options truly represent a better deal for your situation. Remember that the "best" payment method varies based on your individual needs, shopping habits, and financial circumstances.

Services like GetBack can help you navigate the class action settlement process, including weighing payment options for each settlement. By making informed choices about how you receive your compensation, you can maximize the value you receive from class action settlements while minimizing hassle and potential pitfalls.