PLR 1340005: IRS classifies disability and death benefits from seven public plans

Plain-English summary

The IRS classified the federal income tax treatment of disability, death, and cost-of-living benefits paid under seven public retirement plans. It concluded that some duty-related disability and survivor benefits qualify for the section 104(a)(1) exclusion until they convert to normal retirement benefits, while other disability and death benefits are taxable except for available basis recovery. The result depended on the plan, whether the injury or death was duty-related, the amount of the benefit, and whether the payment was tied to retirement or service. The ruling did not address federal tax consequences under provisions other than those specifically discussed.

Ruling snapshot

• Question: Which disability, death, and cost-of-living benefits under seven public retirement plans are excluded from gross income under IRC § 104(a)(1)?
• Outcome: Mixed, some benefits excluded and others taxable
• Key authorities: IRC § 104(a)(1); Treas. Reg. § 1.104-1(b); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201340005 Third Party Communication: None
Release Date: 10/4/2013 Date of Communication: Not Applicable
Index Number: 104.02-00
Person To Contact:
--------------------------------------------------------- --------------------------, ID No. ----------------
------------------------------------------------------------ -----------------
--------- Telephone Number:
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---------------------- Refer Reply To:
---------------------------------------- CC:TEGE:EB:HW
PLR-110181-13
Date:
June 26, 2013

Legend

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

Administrator = ----------------------------------------------------

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

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

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

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

Plan C = -------------------------------------------------------------

Plan D = -----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------

Plan E = --------------------------------------------------------------
PLR-110181-13 2

Plan F = -----------------------------------------------------------------

Plan G = -------------------------------------------------------------------

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

This is in reply to a letter dated February 27, 2013, and subsequent correspondence from
your authorized representatives, requesting rulings on behalf of Taxpayer, concerning the
federal income tax treatment under § 104(a)(1) of the Internal Revenue Code (Code) of
certain disability retirement benefits paid under Plans A, B, C, D, E, F and G.

Taxpayer is an independent board and trustee of the seven Plans covered by this ruling.
Taxpayer has established and maintained the Plans pursuant to the laws of the State.
The Administrator is responsible for the day-to-day operation and administration of the
seven Plans. Taxpayer determines, in accordance with established rules and
procedures, whether an individual has become disabled and is eligible for benefits under
the relevant Plan due to the member’s disability. The disability benefits paid by each of
the Plans are determined based on the benefit formula that applies to the Plan and the
member and are paid to the member until normal retirement age. Section 19-2-406(4) of
the Statute requires that disability retirement under all the Plans must be converted to a
service retirement benefit when the member attains normal retirement age under the
Plan. Accordingly, none of the seven Plans provide for disability benefits beyond the
member’s normal retirement age.

Plan A

Plan A, established under § 19-3 of the Statute, is a tax-qualified multiple-employer plan
that provides retirement, disability, and death benefits to eligible employees of the State,
the State university system, local governments, and certain school districts within the
State. Membership in Plan A is mandatory and a condition of employment for eligible
employees. In addition, § 19-3-412 of the Statute permits certain newly hired employees
and elected officials to elect to become active members of Plan A. All eligible employees
who are members of Plan A are required to contribute toward the cost of their benefits
under Plan A. In addition to retirement benefits, Plan A provides members and their
beneficiaries with disability and death benefits.
PLR-110181-13 3

Under Plan A, a member who has completed at least 5 years of membership service is
eligible to qualify for disability retirement benefits, if certain conditions are satisfied. Plan
A does not distinguish between duty-related and non-duty related disability. Death
benefits under Plan A are the same whether the death is duty-related or not-duty related.
§§ 19-3-1201, 19-3-1202 of the Statute.

Section 19-3-1605 of the Statute sets forth the cost of living adjustment rates that apply to
certain Plan A benefits.

Plan B

Plan B, established under § 19-5 of the Statute, is a tax-qualified defined benefit plan that
provides retirement, disability, and death benefits to all State district court judges, justices
of the State Supreme Court, and the Chief and associate water judges and their
beneficiaries. § 19-5-301 of the Statute. Membership in Plan B is mandatory and a
condition of employment for covered individuals.

Pursuant to § 19-5-601 of the Statute, Plan B provides members and their beneficiaries
with non-duty and duty-related disability and death benefits. Under Plan B, a member
who incurs a non-duty related disability receives a disability retirement benefit that is the
actuarial equivalent of the member’s service retirement under Plan B at the time of
disability. § 19-5-601(1) of the Statute.

Pursuant to § 19-5-601(2) of the Statute, Plan B provides a member who is disabled as a
direct result of any service or duty for the State judiciary a disability retirement benefit
equal to the greater of 50% of the member’s current salary or 50% of the member’s
highest average compensation. If a member selected one of the optional forms of
benefits described in § 19-5-701, Plan B would provide an annuity to the member’s
contingent annuitant if the member dies while receiving duty-related disability benefits.

Plan B also provides separate duty-related and non-duty related death benefits.
According to § 19-5-801 of the Statute, the designated survivor of a Plan B member who
dies as a direct and proximate result of injury received in the course of the Plan B
member’s service or duty is paid a survivorship benefit.

Sections 19-5-901 and 19-5-902 of the Statute set forth the cost of living adjustment rates
that apply to certain Plan B benefits.

Plan C

Plan C, established under § 19-6 of the Statute, is a tax-qualified defined benefit plan that
provides retirement, disability, and death benefits to all State Highway Patrol personnel
and their beneficiaries. According to § 19-6-301 of the Statute, membership in Plan C is
PLR-110181-13 4

mandatory and a condition of employment for all members of the State highway patrol,
including supervisors and assistant supervisors.

Pursuant to § 19-6-601 of the Statute, Plan C provides members and their beneficiaries
with non-duty and duty-related disability and death benefits. Under Plan C, a member
who incurs a non-duty disability receives a disability retirement benefit that is the actuarial
equivalent of the service retirement under Plan C at the time of disability. § 19-6-601(1)
of the Statute.

As required by § 19-6-601(2) of the Statute, Plan C provides a member who is disabled
as a direct result of the member’s service in the line of duty a disability retirement benefit
equal to: (1) 50% of the member’s highest average compensation, if the member’s
disability occurs before completing 20 years of membership service, or (2) 2.5% of the
member’s highest average compensation for each year of service credit, if the member’s
disability occurs after completing 20 years or more of membership service.

Upon the death of a member who is receiving disability retirement benefits from Plan C, §
19-6-601(3) of the Statute requires Plan C to continue to provide disability retirement
benefits to the member’s surviving spouse or dependent children.

Plan C also provides separate duty-related and non-duty related death benefits.
According to § 19-6-901 of the Statute, the surviving spouse or dependent child of an
active member of Plan C who dies as a direct and proximate result of injury received in
the course of the member’s service is paid a monthly benefit from Plan C equal to 50% of
the member’s highest average compensation. Under § 19-6-902 of the Statute, the
surviving spouse or dependent child of an active member of Plan C who dies before the
member’s retirement age are paid a survivorship benefit that is the actuarial equivalent of
the member’s early retirement benefit under Plan C.

Section 19-6-710 of the Statute sets forth the cost of living adjustment rates that apply to
certain Plan C benefits.

Plan D

Plan D, established under § 19-7 of the Statute, is a tax-qualified multiple-employer
defined benefit plan that provides retirement, disability, and death benefits to criminal
investigators, detention, and all State sheriffs and their beneficiaries. According to § 19-
7-301 of the Statute, membership in Plan D is mandatory and a condition of employment
for all sheriffs, investigators, or detention officers, unless the eligible employee was a
member of Plan A and chose to remain a member of Plan A during the relevant period.
All eligible employees who are members of Plan D are required to contribute toward the
cost of their benefits under Plan D.
PLR-110181-13 5

Pursuant to § 19-7-601 of the Statute, Plan D provides members and their beneficiaries
with non-duty and duty-related disability and death benefits. Under Plan D, a member
who incurs a non-duty disability receives a disability retirement benefit that is the actuarial
equivalent of the service retirement under Plan D at the time of disability. § 19-7-601(1)
of the Statute.

Section 19-7-601(2) of the Statute requires that Plan D provide a member who is disabled
as a direct result of the member’s service in the line of duty a disability retirement benefit
equal to: (1) 50% of the member’s highest average compensation if the member’s
disability occurs before the member completes 20 years of membership service, or (2)
2.5% of the member’s highest average compensation for each year of service credit if the
member’s disability occurs after the members completes 20 years or more of membership
service.

Plan D, pursuant to § 19-7-901 of the Statute, provides an annuity to the member’s
contingent annuitant if the member dies while receiving duty-related disability benefits
from Plan D and the member selected one of the optional forms of benefits described in §
19-7-1001 of the Statute.

Plan D also provides separate duty-related and non-duty related death benefits.
According to § 19-7-901(3) of the Statute, the beneficiary of an active member who the
Taxpayer determined to have died as direct and proximate result of injury received in the
course of the member’s service is paid a monthly benefit equal to 50% of the member’s
highest average compensation.

Under Plan D, the beneficiary of an active member who dies for a non-duty related reason
before reaching retirement age may elect to receive the member’s accumulated
contributions in a lump sum payment or a survivor benefit equal to 2.5% of the highest
average compensation for each year of service credit, actuarially reduced from age 65 or
from the date the member would have completed 20 years of membership service, using
the factor that provides the greater benefit. § 19-7-901(1) and (2)

Section 19-7-711 of the Statute sets forth the cost of living adjustment rates that apply to
certain Plan D benefits.

Plan E

Plan E, established under § 19-8 of the Statute, is a tax-qualified multiple-employer
defined benefit plan that provides retirement, disability and death benefits to all persons
employed as peace officers. According to § 19-8-301 of the Statute, membership in Plan
E is mandatory and a condition of employment as long as the member is employed as a
peace officer. All eligible employees who are members of Plan E are required to
contribute toward the cost of their benefits under Plan E.
PLR-110181-13 6

Pursuant to § 19-8-701 of the Statute, Plan E provides members and their beneficiaries
with non-duty and duty-related disability and death benefits. Under Plan E, a member
who incurs a non-duty disability receives a disability retirement benefit that is the actuarial
equivalent of the service retirement under Plan E at the time of disability. § 19-8-701(1)
of the Statute.

Section 19-8-701(2) of the Statute requires that Plan E provide a member who is disabled
as a direct result of the member’s service in the line of duty a disability retirement benefit
equal to: (1) 50% of the member’s highest average compensation if the member’s
disability occurs before completing 20 years of membership service, or (2) 2.5% of the
member’s highest average compensation for each year of service credit if the member’s
disability occurs after completing 20 years or more of membership service. A member
must have at least five years of service to be eligible for duty-related disability benefits
under Plan E.

Plan E provides an annuity to the member’s contingent annuitant if the member dies while
receiving duty-related disability benefits from Plan E and the member selected one of the
optional forms of benefits described in § 19-8-801 of the Statute.

Plan E also provides separate duty-related and non-duty related death benefits.
According to § 19-8-1001 of the Statute, the designated beneficiary of a member who the
Taxpayer determines died as a direct and proximate result of injury received in the course
of the member’s service is paid a monthly survivorship benefit equal to 50% of the
member’s highest average compensation. However, according to § 19-8-1001 of the
Statute, in the case of a member who completed more than 25 years of service credit
before his death, the survivorship benefit must equal 2% of the member’s highest average
compensation for each year of service credit.

Section 19-8-1105 of the Statute sets forth the cost of living adjustment rates that apply to
certain Plan E benefits.

Plan F

Plan F, established under § 19-9 of the Statute, is a tax-qualified multiple-employer
contributory defined benefit plan that provides retirement, disability and death benefits to
eligible police officers employed by first- and second-class cities, and other cities that
adopt Plan F. Membership in Plan F is mandatory and a condition of employment for all
police officers who are employed by a city that participates in Plan F. All eligible
employees who are members of Plan F are required to contribute toward the cost of their
benefits under Plan F.

Plan F does not distinguish between duty-related and non-duty related disability or death
benefits. §§ 19-9-902, 19-9-903 and 19-9-909 of the Statute. In addition, according to §
PLR-110181-13 7

19-9-1101 of the Statute, death benefits under Plan F are the same whether the death is
duty-related or non-duty related.

Section 19-9-1009 of the Statute sets forth the cost of living adjustment rates that apply to
certain Plan F benefits.

Plan G

Plan G, established under § 19-13 of the Statute, is a tax-qualified multiple-employer
defined benefit plan that provides retirement, disability, and death benefits to firefighters
employed by first and second-class cities, other cities or rural fire districts that adopt Plan
G. Membership in Plan G is mandatory and a condition of employment for all full-paid
firefighters who are employed by a city that participates in Plan G and firefighters hired by
the State Air National Guard on or after a certain date. § 19-13-301. All eligible
employees who are members of Plan G are required to contribute toward the cost of their
benefits under Plan G.

Plan G does not distinguish between duty-related and non-duty related disability or death
benefits. §§ 19-13-802, 19-13-803 and 19-13-902 of the Statute.

Section 19-13-1010 of the Statute sets forth the cost of living adjustment rates that apply
to certain Plan G benefits.

Section 104(a)(1) of the Code excludes from gross income amounts that are 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 employees for personal
injuries or sickness incurred in the course of employment. Section 1.104-1(b) of the
Income Tax Regulations provides that the exclusion from income of amounts described in
section 104(a)(1) also applies to compensation which is paid under a workmen’s
compensation act to the survivor or survivors of a deceased employee. This exclusion,
however, is not available and does not apply to a retirement pension or annuity 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.

Accordingly, based on the representations made, and authorities cited above, we
conclude as follows:

(1) Disability benefits paid under Plans B (§ 19-5-601(2) of the Statute) to a member who
suffers a disability due to a job-related illness or injury will not be considered gross
income to the member (or the member’s survivors under § 19-5-701 of the Statute) under
section 104(a)(1) of the Code, until such benefits convert to normal service retirement
pursuant to § 19-2-406(2) of the Statute, at which point the entire benefit will be taxable
PLR-110181-13 8

and subject to basis recovery. Non-duty related disability benefits under Plan B (§ 19-5-
601(1) of the Statute) are taxable to the member (or the member’s survivors).

(2) Disability benefits that do not exceed 50% of the member’s highest average
compensation that are paid under Plan C (§ 19-6-601(2)), Plan D (§ 19-7-601(2)), and
Plan E (§ 19-8-701(2)) to a member who suffers a disability due to a job-related illness or
injury will not be considered gross income to a member (or the member’s survivors) under
section 104(a)(1) of the Code, until such benefits convert to normal service retirement
pursuant to § 19-2-406(2) of the Statute, at which point the entire benefit will be taxable
and subject to basis recovery. Amounts that exceed 50% of the member’s highest
average compensation are taxable under Plans C, D and E to the member (or member’s
survivors).

(3) All disability benefits (whether or not duty-related) under Plan A (§ 19-3-1002), Plan F
(§§ 19-7-902; 19-9-903) and Plan G (§ 19-13-802) paid to a member (or the member’s
survivors) will be taxable income to the member (or the member’s survivors), except to
the extent basis recovery is available.

(4) Death benefits that do not exceed 50% of the member’s highest average
compensation and that are paid under Plan C (§ 19-6-901), Plan D (§ 19-7-901(3)), and
Plan E (§ 19-8-1001) to survivors of members who die as a result of the performance of
duty will not be taxable income to the recipient under section 104(a)(1) of the Code.

(5) All death benefits (whether or not duty-related) under Plans A, F, and G paid to a
member will be taxable income to the member’s survivors, except to the extent basis
recovery is available.

(6) Death benefits paid under Plans B, C, D and E to a member whose death is not due
to a job-related illness or injury will be taxable income to the member’s survivors, except
to the extent basis recovery is available.

(7) Annual cost of living adjustments paid under Plans A, B, C, D, E, F and G to a
member will not be considered gross income to the member to the same extent that the
underlying duty-related disability retirement payments or survivor benefits are not
considered gross income to the member under section 104(a)(1) of the Code.

No opinion is expressed or implied concerning the federal tax consequences under any
other provision of the Code or regulations other than those specifically stated above.
PLR-110181-13 9

These rulings are directed only to the Taxpayer who requested them. Section 6110(k)(3)
of the Code provides that they 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 & Government
                                   Entities)