PLR 1352006: exclusion for accidental disability and death benefits

Plain-English summary

The ruling addresses five public employee pension plans that provide accidental disability retirement allowances and accidental death benefits. The IRS concluded that the plans' governing statutes are in the nature of workers' compensation acts because the benefits arise from qualifying workplace injuries or deaths. Accidental disability retirement allowances are excluded from gross income under IRC § 104(a)(1). Survivor benefits are excluded to the extent they do not exceed the underlying amount that was excludable for the retiree. Certain accidental death benefits are also excluded, subject to the specific statutory limits described in the ruling.

Ruling snapshot

• Question: Which accidental disability and death benefits qualify for exclusion under IRC § 104(a)(1)?
• Outcome: Approved
• 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: 201352006 Third Party Communication: None
Release Date: 12/27/2013 Date Of Communication: Not Applicable
Index Number: 104.02-00
Person To Contact:
------------------------------ -----------------, ID No. ------------------
--------------------- Telephone Number:
------------------------------------------------------ ----------------------
---------------------------------------------- Refer Reply To:
---------------------------- CC:TEGE:EB:HW
---------------------------------------- PLR-123571-13
Date:
September 18, 2013

Legend

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

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

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

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

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

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

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

Plan E = ----------------------------------------------------

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

This is in response to your letter of May 10, 2013, requesting rulings on behalf of
Taxpayer concerning the federal income tax treatment under section 104(a)(1) of the
Internal Revenue Code (Code) of certain accidental disability allowances and death
benefits provided to public employees and their survivors under Plans A through E.
PLR-123571-13 2

Taxpayer is responsible for the administration of Plans A through E (the Plans), along
with several other qualified defined benefit plans for public employees in State. The
Plans are established under and governed by the Statute.

Plan A is a cost-sharing multiple-employer public defined benefit plan established to
provide pension benefits for most employees of State, and any county, municipality,
school district, or public agency. Membership in Plan A is generally required as a
condition of employment for most employees of the State or any county, municipality,
school district, or public agency. Certain members of Plan A qualify to enroll into
special employee groups, such as certain law enforcement officers, prosecutors,
legislators, and workers’ compensation judges.

Plan B is a cost-sharing, multiple-employer public defined benefit plan established to
provide pension benefits for substantially all teachers or members of the professional
staff and other employees who have titles that are unclassified, professional, and
certified. Membership in Plan B is mandatory for substantially all members of the
professional staff and other employees who have titles that are unclassified,
professional, and certified.

Plan C is a cost-sharing, multiple-employer public defined benefit plan established to
provide pension benefits for all policemen and firemen in municipalities where local
police and firemen pension funds existed prior to a certain date or where Plan C was
adopted by referendum or resolution, and for certain State and county employees.
Enrollment is restricted to eligible policemen and firemen who are permanent and full-
time and who pass the physical and mental fitness requirements.

Plan D is a single-employer public defined benefit plan established to provide pension
benefits for all uniformed officers and troopers of State police. It is mandatory for them
to enroll in Plan D.

Plan E is a single-employer public defined benefit plan established to provide pension
benefits for employees of State penal institutions, employed prior to a certain date, who
did not transfer to Plan C. Plan E no longer accepts new members. There are no active
members in Plan E, only retirees or their survivors who receive benefits.

Statute sections 43:15A-43 (Plan A), 18A: 66-39(c) (Plan B), 43:16A-7(1) (Plan C),
53:5A-10(a) (Plan D), and 43:7-12 (Plan E) each separately identify eligibility for an
accidental disability retirement allowance for the members of each respective Plan.
Each Statute section provides for a board of trustees or a commission to determine that
an accidental disability allowance is payable upon finding that an employee is
permanently and totally disabled as a direct result of a traumatic event occurring during
and as a result of the performance of his regular or assigned duties.
PLR-123571-13 3

After a board of trustees or a commission determines that an accidental disability
allowance is payable, Statute sections 43:15A-46 (Plan A), 18A:66-42 (Plan B), 43:16A-
7(2) (Plan C), 53:5A-10b (Plan D), and 43:7-12 (Plan E) provide for the determination of
the amount of benefits. The Statute sections for Plans A and B provide for an annuity
which is the actuarial equivalent of the member’s accumulated deductions, plus interest,
and a pension which, when added to the annuity, totals 72.7% of the member’s actual
annual compensation for which Plan contributions were being made at the time of the
accident. The Statute section for Plan C provides for the payment of an annuity which
is the actuarial equivalent of the member’s accumulated contributions and interest, and
a pension which, when added to the annuity, totals 2/3 of the member’s actual annual
compensation for which Plan C contributions were being made at the time of the
accident or retirement (whichever is greater). The Statute section for Plan D provides for
an annuity which is the actuarial equivalent of the member’s accumulated contributions
and interest, and a pension which, when added to the annuity, totals 2/3 of the
member’s final compensation.

Statute sections 43:15A-50 (Plan A) and 18A:66-47 (Plan B) provide a member who is
retiring with an election to receive benefits in a lifetime retirement allowance or to elect
to receive the actuarial equivalent of the retirement allowance in a lesser benefit
payable throughout life. If a member who retired on an accidental disability retirement
allowance has elected to receive the actuarial equivalent in a lesser benefit, the
member’s beneficiary receives an actuarially equivalent lesser benefit. For Plans A and
B, the Statute sections provide for five optional amounts that may apply to a member’s
beneficiary.

Statute sections 43:16A-12.1 (Plan C), 53:5A-25 (Plan D) and 43:7-9 (Plan E) provide
varying amounts of benefits to the spouse and children of a member who has retired on
an accidental disability retirement allowance. For Plans C, D, and E, a member’s widow
or widower is paid a pension of 50 percent of final compensation for his or her use, to
continue during widowhood, plus 15 percent of such compensation payable to one
surviving child or an additional 25% of such compensation to two or more children. If
there is no surviving widow or widower, 20 percent of compensation will be paid to one
surviving child, 35 percent of compensation to two surviving children in equal shares
and 50 percent if there are three or more children.

Statute sections 43:15A-49 (Plan A), 18A:66-46 (Plan B), 43:16A-10 (Plan C) and
53:5A-14 (Plan D) provide for accidental death benefits upon the death of the member
in active service as a result of an accident met in the actual performance of duty at
some definite time and place. Under each of the Statute sections, the death benefit
consists of a pension. For all Plans, the amount of the benefit under each statute is
calculated on a percentage of the compensation upon which contributions by the
member were based in the last year of creditable service.
PLR-123571-13 4

For Plans A and B, the death benefit is 50 percent of the compensation for the surviving
spouse. It is 20 percent, 35 percent or 50 percent to one, two, or three or more
surviving children, respectively, if there is no surviving spouse. It is a 35 percent or 40
percent benefit paid to one or two surviving parents, respectively, if there is no surviving
spouse or children.

For Plan C, the death benefit is the annual compensation if death occurs in the first year
of creditable service and is 70 percent for the surviving spouse. It is 20 percent, 35
percent or 50 percent to one, two, or there or more surviving children, respectively, if
there is no surviving spouse. It is a 35 percent or 40 percent benefit paid to one or two
surviving parents, respectively, if there is no surviving spouse or children.

For Plan D, the percentage multiplier may be applied to “final compensation” or to
“adjusted final compensation.” The compensation is the annual compensation if death
occurs in the first year of creditable service. “Final adjusted compensation” is defined
as final compensation increased by the same percentage increase applied in any
adjustments of the compensation schedule of active members after the member’s death
and before the date on which the deceased member of the retirement system would
have accrued 25 years of service under the assumption of continuous service. The
applicable percentage multiplier for calculating a portion of the death benefit is 70
percent for the surviving spouse. It is 20 percent, 35 percent or 50 percent to one, two,
or three or more surviving children, respectively, if there is no surviving spouse. It is a
35 percent or 40 percent benefit paid to one or two surviving parents, respectively, if
there is no surviving spouse or children.

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.

In Rev. Rul. 80-44, 1980-C.B. 34, a statute in the nature of a workmen’s compensation
act provided for an allowance of the greater of (A) 60 percent of the individual’s average
final compensation, or (B) the amount to which the individual would be entitled under
the normal, years of service, retirement plan. The ruling concluded that the benefits
under the statute were excludable under section 104(a)(1) of the Code to the extent that
they did not exceed 60 percent of the final average compensation. Any excess over 60
PLR-123571-13 5

percent of final average compensation was attributable to length of service, and
therefore, not excludable from gross income.

Rev. Rul. 80-84, 1980-1 C.B. 35, considered section 183 of a Los Angeles, California
statute that provided benefits to survivors when “any member of the Fire or Police
Department shall die… after retirement, or while eligible for retirement from such
department on account of years of service…”. The ruling concluded that benefits paid to
employees’ survivors may qualify as paid under a statute in the nature of a workmen’s
compensation act where those benefits are a mere continuation of employees’ section
104(a)(1) benefits.

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

(1) Section 43:15A-43 (Plan A), section 18A: 66-39(c) (Plan B), section 43:16A-7(1)
(Plan C), section 53:5A-10(a)(Plan D), and section 43:7-12(Plan E) are statutes in the
nature of workmen’s compensation acts under section 104(a)(1) of the Code because
payments for accidental disability retirement are only made if the member is
permanently and totally disabled as a direct result of a traumatic event occurring during
and as a result of the performance of his regular or assigned duties.

Accidental disability retirement allowance paid under section 43:15A-46 (Plan A) and
section 18A:66-42 (Plan B) shall not be considered gross income to the recipient under
section 104(a)(1) of the Code.

Accidental disability retirement allowance paid under section 43:16A-7(2) and (3) (Plan
C), section 53:5A-10 b and c (Plan D), and section 43:7-12 (Plan E) shall not be
considered gross income to the recipient under section 104(a)(1) of the Code.

(2) Accidental disability survivor benefits paid under section 43:15A-50 (Plan A), section
18A:66-47 (Plan B), section 43:16A-12.1 (Plan C), section 53:5A-25 (Plan D), and
section 43:7-9 (Plan E) to a survivor of an accidental disability retirement retiree shall
not be considered gross income to the recipient to the extent the amount does not
exceed the underlying allowance that was excludable from the retiree’s gross income
under section 104(a)(1) of the Code.

(3) Accidental death benefits paid to a survivor of a member who dies as a result of an
accident met in the actual performance of duty, shall not be considered gross income to
the recipient under section 104(a)(1) of the Code if paid under section 43:15A-49 a.(1)
(Plan A) but only to the extent of the benefits specified in section 43:15A-49 b and e or,
if paid under section 18A:66-46 a(1) (Plan B), but only to the extent of the benefits
specified in section 18A:66-46 b and e.
PLR-123571-13 6

Accidental death benefits paid to a survivor of a member who dies as a result of an
accident met in the actual performance of duty, shall not be considered gross income to
the recipient under section 104(a)(1) of the Code if paid under section 43:16A-10(1)(a)
(Plan C) but only to the extent of the benefits specified in section 43:16A-10(2) and (5).

Accidental death benefits paid to a survivor of a member who dies as a result of an
accident met in the actual performance of duty, shall not be considered gross income to
the recipient under section 104(a)(1) of the Code if paid under section 53:5A-14a.(1)
(Plan D) but only to the extent of the benefits specified in section 53:5A-14 b.(1), b.(2)
and e.

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

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

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