Service-related disability benefits are excluded from income

Plain-English summary

Local pension plans paid disability benefits under a state statute to members whose employment ended because of an injury received while performing official duties or an occupational disease arising from employment. The benefits were based on salary before retirement and family status, with an offset for benefits from a money purchase plan. They were not determined by the member's age, length of service, or prior contributions. The IRS concluded that the state provision was in the nature of a workers' compensation act. Benefits paid under that provision, after the statutory offset, are excluded from members' gross income under section 104(a)(1).

Ruling snapshot

• Question: Are the plans' service-related disability benefits excluded as workers' compensation?
• Outcome: Yes, after the offset required by the state statute.
• Key authorities: IRC §§ 61 and 104; Treas. Reg. § 1.104-1(b)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201606020                                              Third Party Communication: None
Release Date: 2/5/2016                                         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-130420-15
                                                               Date:
                                                               November 06, 2015




Legend

Taxpayer          =         ----------------------
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State             =        -------------

Statute           =         ---------------------------------------------------------
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Plans             =        ------------------------------------------------------------------------------------------
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Dear -----------------:

This is in reply to your letter dated June 10, 2015, for a ruling concerning whether
certain disability benefits paid by the Plans under section 806.5 of the Statute are
excludable from the gross income of members under section 104(a)(1) of the Internal
Revenue Code (the Code).

The Statute requires employers in State to provide the pension benefits of the statewide
defined benefit plan established by the Statute. However, the Statute permits
employers to withdraw from the statewide pension plan if they establish and maintain a
locally administered and financed alternative pension plan that is subject to section
601(1)(b) of the Statute.

Section 601(1)(b)(II) of the Statute provides that “The members of such plan hired
before, on, or after April 7, 1978, shall be covered by the provisions of sections … 803,
PLR-130420-15                                 2

…807, … and 807.5 in lieu of any other defined disability and preretirement death
benefits.”

Sections 803(1) and (2) of the Statute provide that a member who is not eligible for the
normal retirement pension described in section 403, or a local defined benefit retirement
pension selected pursuant to section 704(3), or provided pursuant to Article 30.5 of the
Statute, and who becomes totally or occupationally disabled, shall be retired from active
service for disability and shall be eligible to receive disability benefits under section 803
or 806.5 of the Statute. The annual disability benefits provided are based on a certain
percentage of a member’s annual base salary paid to the member immediately
preceding retirement and an additional amount if the member had a spouse and
dependent children at the time of the disability. Sections 803(1)(a) and (b), (2)(a) and
(b), and 806.5 of the Statute.

Section 806.5(1) of the Statute provides that if “a member, who is otherwise eligible to
apply for the disability retirement benefits under section … 803, is required to terminate
the member’s regular employment due to a total or occupational injury … that is the
result of an injury received while performing official duties or an occupational disease
arising out of and in the course of the member’s employment, the member is eligible for
a disability benefit in an amount provided for in section … 803(1).” Section 806.5(3) of
the Statute states that “The 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 or in the course of
employment.”

Section 804(2) of the Statute states that “the benefits payable under section … 803 or
806.5 to any member … who at the time of the award of such benefits is a member of a
money purchase plan pursuant to this article … shall be reduced by an amount that is
the actuarial equivalent of the benefits such member receives from any such money
purchase plan, whether the benefits received from the money purchase plan are paid on
a periodic basis or in a lump sum.”

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
PLR-130420-15                                  3

also states that this exclusion does not apply to the amount received either 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 to the extent that it is in excess of the amount
provided in the applicable workmen’s compensation act or acts.

The fact that the amount received as a disability retirement pension is computed with
regard to the employee’s salary prior to retirement does not disqualify the payment from
being in the nature of workmen’s compensation. See Rev. Rul. 85-104, 1985 C.B. 52;
Rev. Rul. 68-10, 1968-1 C.B. 50.

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 by the Plans under section 806.5 of the Statute, as offset by the benefits
funded pursuant to section 804(2) of the Statute, are excludable from the member’s
gross income under section 104(a)(1) of the Code.

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.

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,

                                       /S/


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



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