PLR 1034012: Health-plan contributions and payments excluded from income and employment taxes

Plain-English summary

The IRS considered two plans adopted by a city to pay post-employment health and medical expenses. The plans were funded by the city and mandatory employee contributions, and covered medical-care expenses and health-insurance premiums. The IRS ruled that contributions to the plans and payments used exclusively for participants’ health and medical benefits were excludable from participants’ gross income under §§ 106 and 105(b). It also ruled that the contributions and payments for those benefits were not subject to FICA or FUTA taxes under §§ 3121(a) and 3306(b). The ruling expressed no opinion on whether the plans satisfied the nondiscrimination requirements of § 105(h).

Ruling snapshot

• Question: Are contributions to, and health-benefit payments from, the city’s post-employment medical plans excluded from income and employment taxes?
• Outcome: Approved
• Key authorities: IRC §§ 105(b), 106, 3121(a), and 3306(b); Treas. Reg. §§ 1.61-21(a)(3) and 1.106-1(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201034012 Third Party Communication: None
Release Date: 8/27/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 106.00-00 --------------------, ID No. -------------
Telephone Number:
---------------------
---------------------------------- Refer Reply To:
----------------------- CC:TEGE:EB:HW
----------------------------------- PLR-148971-09
----------------------------- Date:
May 05, 2010

LEGEND

City = -----------------------

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

Plan A = ------------------------------------------------------------------------------------------

Plan B = ---------------------------------------------------------------------

Dear ------------------:

City is a body corporate and politic organized under laws of State. City has adopted
Plan A and Plan B (the Plans) for payment of post employment health and medical
expenses. The post employment health and medical benefits provided are
reimbursement of medical care expenses and reimbursement of health insurance
premiums. Plans provide that both City and eligible employees contribute to fund post
employment health and medical benefits. Employee contributions consist of mandatory
contributions by each participant of salary and mandatory contributions of accumulated
unused sick leave, vacation and severance upon separation from employment.
Individual participants cannot elect to contribute additional amounts to either plan.
Similarly, Plan participants cannot elect to receive non-Plan benefits in lieu of either
Plan contributions or Plan benefits. Mandatory employee contributions are made as a
condition of employment with City.

Section 61(a)(1) of the Internal Revenue Code (the Code) and § 1.61-21(a)(3) of the
Income Tax Regulations provide that, except as otherwise provided in Subtitle A of the
Code, gross income includes compensation for services, including fees, commissions,
fringe benefits, and similar items.
PLR-148971-09 2

However, section 106(a) of the Code provides that gross income of an employee does
not include employer-provided coverage under an accident or health plan.

Section 1.106-1(a) of the regulations provides that the gross income of an employee
does not include contributions which his employer makes to an accident or health plan
for compensation (through insurance or otherwise) to the employee for personal injuries
or sickness incurred by him, his spouse, or his dependents, as defined in § 152. The
employer may contribute to an accident or health plan either by paying the premium (or
a portion of the premium) on a policy of accident or health insurance covering one or
more of his employees, or by contributing to a separate trust or fund (including a fund
referred to in § 105(e)) which provides accident and health benefits directly or through
insurance to one or more of his employees. However, if the insurance policy, trust or
fund provides other benefits in addition to accident or health, § 106 applies only to the
portion of the contributions allocable to accident or health benefits.

Coverage provided under an accident and health plan to former employees and their
spouses and dependents is excludable from gross income under § 106. See Rev. Rul.
62-199, 1962-2 C.B. 32; Rev. Rul. 82-196, 1982-2 C.B. 53.

Section 105(a) provides that, except as otherwise provided in § 105, amounts received
by an employee through accident or health insurance for personal injuries or sickness
shall be included in gross income to the extent such amounts (1) are attributable to
contributions by the employer which were not includible in the gross income of the
employee, or (2) are paid by the employer.

Section 105(b) provides that except in the case of amounts attributable to (and not in
excess of) deductions allowed under § 213 (relating to medical expenses) for any prior
taxable year, gross income does not include amounts referred to in subsection (a) if
such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer
for expenses incurred for medical care (as defined in § 213(d)).

Section 3101 imposes taxes under the Federal Insurance Contributions Act (FICA) on
an employee’s wages. Section 3306 imposes taxes under the Federal Unemployment
Tax Act (FUTA). Sections 3121(a) and 3306(b) provide that, with certain exceptions, for
FICA and FUTA tax purposes, the term “wages” means all remuneration for
employment, including the cash value of all remuneration (including benefits) paid in
any medium other than cash. However, §§ 3121(a)(2) and 3306(b)(2) provide that the
term “wages” does not include any payment (including any amount paid by an employer
for insurance) made to or on behalf of an employee or any of his dependents, for
medical or hospitalization expenses.
PLR-148971-09 3

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

(1) Contributions paid to Plans and payments made from Plans which are used
exclusively to pay for the health and medical benefits of Plan participants, their spouses
and dependents are excludable from the gross income of Plan participants under §§
106 and 105(b) of the Code.

(2) Contributions to and payments for health and medical benefits are not subject to
FICA or FUTA taxes under §§ 3121(a) and 3306(b).

No opinion is expressed concerning the Federal tax consequences of Plans under any
other provision of the Code other than those specifically stated herein. In particular, §
3.01(10) of Rev. Proc. 2009-1, 2009-1 I.R.B. 107, provides that the Service will not
issue a ruling concerning whether a self-insured medical reimbursement plan satisfies
the requirements of §105(h) for a plan year. Accordingly, no opinion is expressed
concerning whether Plans satisfy the nondiscrimination requirements of §105(h) of the
Code and §1.105-11 of the regulations.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely



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