Settlement funds can be very complicated. A company may be required to pay a $5 million settlement towards those claimants who were affected by its product, but it may not know whether there are 500 or 5000 claimants. The settlement fund ensures that the entirety of the $5 million is set aside and that every claimant (who files the appropriate paperwork) gets what they are due.
A settlement fund, under IRC SEC 468B, will need its own tax ID/employer identification number. A settlement fund operates much like a trust or an escrow account; after litigation, a company places its settlement money into the fund. A third party then ensures that everyone who qualifies for the settlement is paid out what they need to be paid out.
But because the company can’t simply get back the money, the settlement fund is a separate entity. This is money that belongs to the claimants, but simply hasn’t been allocated yet. And in addition to the money for the claimants, the settlement fund may also be responsible for its own administration costs and legal fees.