PLR 200410007: Duty-related firefighter disability benefits are partly tax-free

Plain-English summary

A local firefighter plan paid disability benefits tied to a state statute covering injuries or disease incurred on duty. The IRS concluded that the statute was in the nature of a workers' compensation act because eligibility depended on a service-related condition and the statutory benefit did not depend on age, service length, or prior contributions. Plan benefits up to the statutory amount were excluded from firefighters' income under section 104(a)(1). Amounts above that limit were not excluded under that provision because they were tied to age, service length, or prior contributions. The IRS did not address a separate supplemental disability benefits program.

Ruling snapshot

• Question: Which firefighter disability plan payments are excluded from income as workers' compensation?
• Outcome: Mixed: payments up to the statutory amount are excluded; excess amounts are not.
• Key authorities: IRC § 104(a)(1); Treas. Reg. § 1.104-1(b).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200410007
Release Date: 03/05/2004
Index Number: 104.02-00

----------------------------
Person To Contact:
------------------------------------------------ ----------------------, ID No. -------------
----------------------------------------------------- Telephone Number:
----------------------------------------- ---------------------
----------------------
Refer Reply To:
CC:TEGE:EB:HW – PLR-131913-03
Date:
-
10/09/2003

Taxpayer = -----------------------------------
--------------------------------------------------

Statute = -----------------------------------------------------------------------------------------
-------
-----------------------------------------------------

State = -------------

Plan = ------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------

Dear ----------------

This is in reply to your request dated March 24, 2003, on behalf of Taxpayer, for a ruling concerning the federal tax treatment under section 104(a)(1) of the Internal Revenue Code (the Code) of benefits received by firefighters from the Plan.

The Statute requires that all employees be covered by the disability and preretirement death benefits under the Statute. Section 806.5 of the Statute provides that if an employee “who is otherwise eligible to apply for disability retirement benefit...is required to terminate the member's regular employment due to a total disability . . . that is the result of an injury received while performing official duties or an occupational disease 2 CC:TE/GE:EB:HW PLR-131913-03

arising out of and in the course of the member's employment, the member is eligible a the disability in an amount provided in section . . . 803." Section 806.5(3) of the Statute states that "[t]he board shall promulgate rules that specify standards for determining whether a member's disability is the result of an injury received while performing official duties or an occupational disease arising out of and in the course of employment...." The annual disability benefits provided are based on a percentage of a member's annual base salary immediately preceding retirement and an additional percentage if the member has a spouse and dependent children at the time of the disability.

As authorized by the Statute (Sections 401 and 601), the Taxpayer withdrew from the statewide defined benefit plan and created its own locally administered and financed plan. Pension and disability benefits for firefighters are available through the Plan.

Section 61(a) of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including compensation for services.

Section 104(a)(1) of the Code provides that gross income does not include amounts received under workmen's compensation acts as compensation for personal injuries or sickness.

Section 1.104-1(b) of the Income Tax Regulations states that section 104(a)(1) of the Code excludes from gross income amounts received by an employee under a workmen's compensation act or under a statute in the nature of a workmen's compensation act that provides compensation to the employee for personal injury or sickness incurred in the course of employment. Section 1.104-1(b) of the regulations also states that this exclusion does not apply to the amount received either (1) to the extent that it is determined by reference to the employee’s age or length of service, or the employee’s prior contributions, even though the employee’s retirement is occasioned by an occupational injury or sickness, or (2) to the extent that it is in excess of the amount provided in the applicable workmen’s compensation act or acts.

Based on the information submitted, representations made and authorities cited, we conclude as follows:

Section 806.5 of the Statute limits benefits to a class of employees with service-incurred injuries or disease and the benefits are not determined with reference to the employee's age, length of service or prior contributions. Accordingly, section 806.5 of the Statute is a statute in the nature of a workmen's compensation act.

Benefits paid under the Plan to offset services-related benefits provided under section 806.5 of the Statute are excludable from the employee's gross income under section 3 CC:TE/GE:EB:HW PLR-131913-03

104(a)(1) of the Code. Amounts received in excess of the benefit amount determined under section 806.5 of the Statute are not excludable under section 104(a)(1) of the Code because they are determined by reference to the employee’s age, length of service or prior contributions. See, Rev. Rul. 72-44, 1972-1 C.B. 31; Rev. Rul. 80-44, 1980-1 C.B. 34; Rev. Rul. 85-105, 1985-2 C.B. 53.

No opinion is expressed as to the federal tax consequences of the transaction under any other section of the Code or Statute other than those specifically stated above. In particular, no opinion is expressed as to the federal tax consequences of the receipt of benefits under the supplemental disability benefits program pursuant to section 803(1)(c) and (2)(c) and section 803.5 of the Statute.

This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Harry Beker
Chief, Health and Welfare Branch
Office of Division Counsel/
Associate Chief Counsel
(Tax Exempt and Government Entities)

Enclosure (1)
Copy for section 6110 purposes