CCA 1319015: Cash paid instead of health benefits is taxable wages

Plain-English summary

Chief Counsel Advice addresses cash payments made instead of employer-provided health benefits. The advice states that the cash payments are regular wages reported on Form W-2, even if the health benefits themselves might have been excludable from gross income. It cites IRC § 106 and several court decisions for the conclusion that a settlement payment does not inherit a favorable tax treatment merely because it relates to an obligation that would have received that treatment.

Ruling snapshot

• Question: Are cash payments made instead of excludable health benefits taxable wages?
• Outcome: Advice given.
• Key authorities: IRC §§ 106 and 3401; Adkins v. United States, 882 F.2d 1078 (6th Cir. 1989); LTV Steel Co., Inc. v. United States, 215 F.3d 1275 (Fed. Cir. 2000)

Full text (IRS public release)

                                                  1

ID: CCA_2013042214410232 Number: 201319015
Release Date: 5/10/2013
Office: --------------
UILC: 3401.01-00

From: -------------------
Sent: Monday, April 22, 2013 2:41:35 PM
To: --------------------
Cc:
Subject: RE: Reporting Interest

Hi ------- -

The analysis here should not be complicated. As I understand the facts, the employer is providing cash
in lieu of the health benefits that it should have provided. Even though the health benefits themselves
may have been excludable from gross income, the cash payments are not. These payments are regular
wages reported on Form W-2. See the Adkins income tax case, which held that a similar settlement was
includible in gross income and not excludable under section 106.Adkins v. United States, 882 F.2d
1078, 1081 (6th Cir.1989)
Lump-sum payments to taxpayers in settlement of lawsuits against former employer concerning
employer's proposed termination of contributions to hospital-medical benefits plan did not fall within
provisions of section which excludes contributions by employer to accident or health plans from gross
income; statute did not provide exemption for payments made by employer directly to employees. 26
U.S.C.A. § 106.

Also, see following quotation from LTV Steel Co., Inc. v. United States, 215 F.3d 1275, 1280 (Fed Cir.
2000), an employment tax case which held that certain payments made under nonqualified plans were
subject to FICA and FUTA taxes.

Simply put, a payment that is specifically made subject to taxation is not rendered
exempt from tax simply because it is made in settlement of an obligation which, had it
been paid, would not have been taxed. See Adkins v. United States, 882 F.2d 1078,
1081 (6th Cir.1989) (lump sum settlement to compensate employees for employer's
failure to make tax-exempt contributions to employee insurance trusts is taxable); Harte
v. United States, 252 F.2d 259, 261-62 (2d Cir.1958) (annuity payments received under
an agreement settling a will contest constituted taxable income from the property of an
estate, even though settlement released plaintiffs' claims on the property of the estate
and a distribution of the property of the estate would have been excluded from plaintiffs'
gross income); see also Ocean Drilling & Exploration Co. v. United States, 220 Ct.Cl.
395, 600 F.2d 1343, 1349 (Ct.Cl.1979) (tax status of an obligation is not altered by the
fact that it can be “traced back” to a prior liability that would have been entitled to more
favorable tax treatment).

I hope this is helpful. Let me know whether you still think it is necessary to discuss.