Is a Maryland state employee's full-salary accident leave pay after a job injury subject to federal and state income tax?

Plain-English summary

A delegate asked the Attorney General whether payments a state employee receives under Maryland's "accident leave" statute, which grants full salary, not partial workers' compensation benefits, to an employee disabled by an on-the-job injury, were subject to federal and state income tax. The Internal Revenue Code excludes from gross income amounts received under workers' compensation acts, and also under any other statute "in the nature of" a workers' compensation act that compensates employees for work-related injuries.

The Attorney General concluded accident leave pay qualified for that exclusion and so was not taxable. The opinion walked through three features the IRS and courts looked for in this kind of exclusion: the benefit comes from a statute (not a private contract), it's limited to work-related disability, and the amount isn't tied to the employee's age or years of service. Maryland's accident leave law checked all three boxes, since it paid full salary only for injuries that would be compensable under the Workers' Compensation Act, ran only from the injury until medical certification of recovery (capped at one year), and had nothing to do with seniority or pension-style formulas. The opinion noted this reversed the office's own earlier informal advice on the subject, explaining that older guidance had predated the court decisions and IRS rulings discussed in this opinion. Because Maryland's income tax starts from federal adjusted gross income, the same exclusion carried over automatically to state tax as well.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here, including the current text of Article 64A's accident leave provisions (since recodified) and the federal tax treatment of workers' compensation-type benefits under 26 U.S.C. §104.

Common questions

Was full-salary accident leave pay for a Maryland state employee's job injury taxable income? No, according to this opinion. The Attorney General concluded these payments were excludable from federal adjusted gross income because Maryland's accident leave statute functioned as a statute "in the nature of" a workers' compensation act, and therefore were not subject to federal or Maryland state income tax either.

Why does it matter whether a benefit statute is "in the nature of" a workers' compensation act? Because federal tax law excludes from gross income not just formal workers' compensation payments but also payments under any other statute that compensates employees for work-related injuries or sickness, as long as the benefit isn't tied to a factor like age or years of service, so the label on the statute doesn't matter as much as how it actually operates.

Did paying accident leave at the employee's full salary, rather than a reduced workers' compensation rate, disqualify it from the tax exclusion? No. The opinion found that paying full salary, and even paying more than a normal workers' compensation benefit would provide, didn't disqualify the payment; what mattered under the governing rulings was the reason the money was paid (a work-related injury), not the amount.

Is accident leave pay the same thing as sick leave pay for tax purposes? No. The opinion distinguished the two: sick leave is earned and accumulated over time and can be used for any illness or injury, while accident leave is neither earned nor accumulated and applies only to injuries that would qualify under the Workers' Compensation Act. The opinion expressed no view on the tax status of ordinary sick leave pay used after accident leave runs out.

Background and statutory framework

Article 64A, §37(g) granted a state employee "accident leave" at full salary when a physician certified that a job-related injury, one that would be compensable under the Maryland Workers' Compensation Act, disabled the employee, running from the date of injury until medical certification of recovery but capped at one year; an employee on accident leave could not also collect temporary total workers' compensation benefits at the same time. Under Secretary of Personnel regulations, accident leave was treated as legally distinct from ordinary sick leave: sick leave accrued at a set rate and could be banked for future use for any illness, while accident leave was neither earned nor accumulated and applied only to the narrower category of job-related injuries. The federal Internal Revenue Code, 26 U.S.C. §104(a)(1), excluded from gross income amounts received under workers' compensation acts, and the applicable Treasury regulation extended that exclusion to statutes "in the nature of" a workers' compensation act providing compensation for work-related injury or sickness; because Maryland's income tax, under TG §10-203, is calculated starting from federal adjusted gross income with no adjustment required for §104(a)(1) exclusions, whatever was excludable federally was excludable for Maryland tax purposes too.

The opinion applied a three-part test drawn from federal case law and IRS revenue rulings to determine whether a benefit statute counts as "in the nature of" a workers' compensation act: the benefit must come from a statute rather than a private contract, the payments must be limited to work-related disability, and the amount must not be determined by the employee's age or length of service. The opinion found Maryland's accident leave statute satisfied all three, and drew a close analogy to an IRS revenue ruling excluding full-pay "administrative leave" for a Washington, D.C. firefighter injured on duty. The opinion also addressed, and rejected, the idea that paying full salary (rather than a reduced workers' compensation rate) disqualified the benefit, citing rulings and a Tax Court decision holding that what matters is the reason for the payment, not its amount, and that payments can even exceed normal workers' compensation levels and remain excludable. The opinion noted this conclusion reversed earlier, outdated informal advice the office had given the Comptroller's Central Payroll Bureau, and expressly declined to address the separate question of whether ordinary sick leave pay used after accident leave is exhausted receives the same tax treatment, noting the IRS had signaled disagreement with a Tax Court suggestion that it might.

Citations and references

Statutes:

• Article 64A, §37(g), the accident leave statute
• Article 64A, §37(g)(4), the State's subrogation rights when a third party causes the injury
• Article 64A, §37(a)(3)(i), governing ordinary sick leave and "sick pay"
• Article 64A, §37(h), providing that sick pay is a separate benefit, not a continuation of salary, for federal payroll tax purposes
• 26 U.S.C. §104(a)(1) (Internal Revenue Code), excluding workers' compensation-type payments from gross income
• 26 U.S.C. §104(a)(2), the parallel exclusion for personal injury lawsuit or settlement damages
• Treasury Reg. §1.104-1(b), interpreting the scope of the §104(a)(1) exclusion
• TG §10-203 (Tax-General Article), tying Maryland adjusted gross income to federal adjusted gross income
• 5 U.S.C. §6234(a), the federal analog excusing certain firefighters and law enforcement officers from having sick leave charged for duty-related injuries
• COMAR 06.01.11.05 and COMAR 06.01.11.09 (including subsections E and F), the Secretary of Personnel's regulations distinguishing sick leave from accident leave

Cases:

• Rutter v. Commissioner, 760 F.2d 466 (2d Cir.), cert. denied 474 U.S. 848 (1985), cited for the three-part test determining exclusion under §104(a)(1)
• Givens v. Commissioner, 90 T.C. 1145 (1988), cited for the principle that the reason for a payment, not its amount, controls the §104(a)(1) exclusion analysis

Other authorities: Revenue Ruling 83-77, 1983-1 C.B. 37; Revenue Ruling 80-84, 1980-1 C.B. 35; Revenue Ruling 68-10, 1968-1 C.B. 50; Revenue Ruling 75-500, 1975-2 C.B. 44; Revenue Ruling 85-104, 1985-2 C.B. 52; Revenue Ruling 83-91, 1983-1 C.B. 38; Mertens' Law of Federal Income Taxation §7.123 (1991), all cited on the scope of the §104(a)(1) workers' compensation-type exclusion.

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1992/Volume77_1992.pdf (this opinion appears at printed page 207 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Taxation - Income Tax - Personnel - Pay Received By An Employee on Accident Leave is Not Subject to Tax

May 14, 1992

The Honorable Timothy F. Maloney
House of Delegates

You have requested our opinion whether payments received pursuant to the accident leave statute, Article 64A, §37(g) of the Maryland Code, are subject to federal and State income tax.

For the reasons stated below, we conclude that payments received under Article 64A, §37(g) may be excluded from federal adjusted gross income and therefore are not subject to either federal or State income tax.1

I

Income Tax Statutes and Regulation

Section 104(a)(1) of the Internal Revenue Code ("I.R.C.") provides, with an exception not pertinent here, that "gross income does not include ... amounts received under workmen's compensation acts as compensation for personal injuries or sickness." 26 U.S.C. §104(a)(1). The relevant regulation makes clear that this exclusion applies not only to payments received under a workers' compensation act as such but also "under a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment." Treasury Reg. §1.104-1(b).

Under §10-203 of the Tax-General Article, an individual's adjusted gross income for purposes of the Maryland income tax is "the individual's federal adjusted gross income for the taxable year as determined under the Internal Revenue Code ...," with certain adjustments required under Maryland law. Maryland law does not require any adjustment for income excluded under I.R.C. §104(a)(1). Hence, if income is excludable under §104(a)(1) for federal income tax purposes, it is likewise excludable for State income tax purposes.

II

Accident Leave Statute and Regulations

Article 64A, §37(g) provides as follows:

(1) An employee who, in the actual performance of his job duties, sustains an accidental injury which would be compensable under the Maryland Workers' Compensation Act shall be granted accident leave with full sick pay if, after medical examination, a physician certifies that the injury or accident disables the employee.

(2) Accident leave shall be granted from the date of the job related injury until a physician certifies that the employee is healed and is physically able to return to work, but may not be extended beyond one year from the injury date. The employer's physician may examine the injured employee periodically to determine the progress of and length of time necessary for his recovery.

(3) The injured employee shall not receive temporary total benefits under workers' compensation while receiving full sick pay under this subsection.2

Accident leave thus has several distinctive characteristics: It is paid because of a State statute; it is paid only for absence from work attributable to an injury sustained in the "actual performance" of the job; the injury must be one that would be compensable under the Maryland Workers' Compensation Act;3 and the amount that is paid is not related to or coordinated with traditional pension formulae, such as years of service. See generally Opinion No. 79-043 (July 20, 1979) (unpublished).

Although the income received by an employee on accident leave is labeled "sick pay," accident leave is not a form of sick leave.4 The two are treated quite separately in the Secretary of Personnel's regulations. Compare COMAR 06.01.11.05 with COMAR 06.01.11.09. An employee earns sick leave at a prescribed rate and accumulates unused sick leave; an employee neither earns nor accumulates accident leave. An injured employee eligible for accident leave would use sick leave or other forms of paid leave only after the employee was no longer able to use accident leave. See COMAR 06.01.11.09F.

III

Analysis

Pay received by an employee under the Maryland accident leave statute meets the criteria for the exclusion in I.R.C. §104(a)(1):

(1) The benefit derives from a statute, amplified by a regulation issued pursuant to a statute, and not from a nonstatutory source like a contract.

(2) Payments are limited to instances of work- related disability.

(3) The payments are not determined by reference to the employee's age or length of service.

See Rutter v. Commissioner, 760 F.2d 466 (2d Cir.), cert. denied 474 U.S. 848 (1985); Givens v. Commissioner, 90 T.C. 1145 (1988), non-acq. in part 1989-1 C.B. 1; Rev. Ruling 83-77, 1983-1 C.B. 37; Rev. Ruling 80- 84, 1980-1 C.B. 35; Rev. Ruling 68-10, 1968-1 C.B. 50. See generally 1 Mertens' Law of Federal Income Taxation §7.123 (1991). As discussed in Part II above, accident leave is not sick leave, though it is termed "sick pay" and is paid at the same rate as sick leave - 100 percent of salary.5 Indeed, one of the principal purposes of accident leave is to permit the injured employee to preserve his or her sick leave.

In our view, Maryland's accident leave statute is substantively indistinguishable from a federal statute determined by the Internal Revenue Service to result in payments that are excludable from gross income. In Rev. Ruling 75-500, 1975-2 C.B. 44, the IRS discussed the status of a D.C. firefighter who received full pay during a period of incapacity resulting from a work-related injury. Under federal law, "[t]he individual received full pay for this period of time, and the absence was charged to administrative leave (rather than sick leave) ...,"6 The IRS concluded that these payments were "paid under a statute in the nature of a workmen's compensation act and, therefore, are excludable in full from the individual's gross income under §104(a)(1)..."7

Moreover, "[t]he fact that the amount received is equal to the employee's salary at the date of the disability ... does not disqualify the payment from qualifying as one in the nature of workmen's compensation." Rev. Ruling 85-104, 1985-2 C.B. 52, 53; Rev. Ruling 68-10, 1968-1 C.B.

50. As the United States Tax Court put it, "It is not the amount of the pay
    which is received which controls [the] determination whether it falls within the exclusion .... Rather, it is the reason for which it has been paid." Givens, 90 T.C. at 1152.

    To summarize, "[i]f disability benefits are received under a
    workmen's compensation act or under a statute in the nature of a workmen's compensation act, they qualify for the Section 104(a)(1) exclusion." Rev. Ruling 85-104, 1985-2 C.B. 52, 53. Moreover, the IRS has written, "[a] statute is in the nature of a workmen's compensation act if it provides compensation to employees only for personal injuries or sickness incurred in the course of employment." Id. Article 64A, §37(g) is such a statute. Finally, "[i]f benefits are computed by a formula that does not refer to the employee's age, length of service, or prior contributions and are provided to a class that is restricted to employee's service-incurred injuries, then the benefits are payments for those injuries, and the statute under which the benefits are paid qualifies as a statute in the nature of a workmen's compensation act." Id. Unlike sick leave itself, which of course is available to employees who are incapacitated as a result of injuries or sickness wholly unrelated to the job, accident leave fully satisfies these criteria.8

    This exclusion from income for accident leave at full salary may be
    viewed as an economic incongruity. It is no more so, however, than the general exclusion from income for damages collected by reason of a lawsuit or settlement. See I.R.C. §104(a)(2).

                                    IV
    
                               Conclusion
    

    In summary, it is our opinion that payments received by an injured
    employee under Article 64A, §37(g) are excludable from gross income and therefore are not subject to federal or State income tax.9

                                              J. Joseph Curran, Jr.
                                              Attorney General
    
                                              Jack Schwartz
                                              Chief Counsel
                                              Opinions & Advice
    
                                              John K. Barry
                                              Assistant Attorney General
    

1
This conclusion is contrary to earlier advice from this office to the Central Payroll Bureau of the Comptroller's Office. However, the original advice on this subject predated the court decisions and many of the revenue rulings discussed in this opinion.

2
Article 64A, §37(g)(4), not set forth in text, deals with the State's subrogation rights if a third person causes a compensable injury under the accident leave statute. See generally 76 Opinions of the Attorney General 323 (1991).

3
As we pointed out in a recent opinion, §37(g) requires "a much closer nexus between the employment and [the] cause of injury" than does the Workers' Compensation Law. See 76 Opinions of the Attorney General at 326 n.4.

4
Sick leave also results in "sick pay." See Article 64A, §37(a)(3)(i). All "sick pay" (except for sick leave taken because of a death in the family) is paid "as a separate benefit... and not as a continuation of salary." Article 64A, §37(h). This latter subsection was added by Chapter 504 of the Laws of Maryland 1981 with the intent of exempting sick pay from social security taxes under the Federal Insurance Contributions Act. See Fiscal Note to Senate Bill 491 (1981 Session).

5
See note 4 above and accompanying text.

6
The relevant statute, 5 U.S.C. §6234(a), provides that no sick leave is to be charged to certain firefighters and law enforcement officers "for an absence due to injury or illness resulting from the performance of duty." Similarly, the regulations implementing Article 64A, §37(g) make clear that sick leave is not to be charged during the period of accident leave. See COMAR 06.01.11.09E and F.

7
The pertinent IRS regulation states that the exclusion "does not apply ... to amounts received as compensation for an occupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's compensation act or acts." Treasury Reg. §1.104-1(b). Payments received under a statute like the accident leave statute, however, "are excludable even if they are in excess of the normal disability benefits payable under a workmen's compensation act." Rev. Ruling 68-10, 1968-1 C.B. 50, 51. See also Rev. Ruling 83-91, 1983-1 C.B. 38.

8
We express no opinion about the tax status of payments received for sick leave taken after the exhaustion of accident leave. See COMAR 06.01.11.09F. Under Givens v. Commissioner, 90 T.C. at 1152, such payments arguably are also within the §104(a)(1) exclusion. The Internal Revenue Service, however, has indicated its nonacquiescence in this part of Givens. See 1989-1 C.B. 1.

9
While we are confident of this conclusion, individual taxpayers should consult their own tax advisers about their appropriate course of action.