Police line-of-duty benefits were partly tax-exempt

Plain-English summary

A public employer's plan paid police officers disability benefits for line-of-duty injuries and paid survivor benefits for line-of-duty deaths. Each benefit generally equaled 50 percent of final average compensation, but a minimum tied to retirement value could produce a larger payment. The IRS ruled that benefits up to the 50 percent formula were excluded from income as workers' compensation under Section 104(a)(1), while any excess tied to retirement value was taxable under Section 72. The same treatment applied to qualifying survivor benefits. Benefits paid to former spouses under domestic relations orders were not excludable under Section 104(a)(1).

Ruling snapshot

• Question: Which disability and death benefits paid under the police plan were excluded from gross income?
• Outcome: Mixed, the 50 percent line-of-duty benefit was excluded, but excess amounts and payments to former spouses were taxable.
• Key authorities: IRC §§ 61, 72, and 104(a)(1); Treas. Reg. § 1.104-1(b); Rev. Rul. 80-44; Rev. Rul. 80-84; Rev. Rul. 85-104.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201819004 Third Party Communication: None
Release Date: 5/11/2018 Date of Communication: Not Applicable
104.00-00, 104.02-00
Person To Contact:
-------------------------------- -------------------------
------------------------------------- Telephone Number:
--------------------------------- ----------------------
--------------------------------- Refer Reply To:
CC:TEGE:EB:HW
PLR-124976-17
Date:
February 07, 2018

LEGEND:

Taxpayer = ------------------------------------
--------------------------------------------------
Plan = -----------------------------------------------------------------------------------------
--------------
Statute = ---------------------------------------------------------------
State = --------------

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

This is in reply to your letter dated August 10, 2017, requesting a ruling on behalf of
Taxpayer, concerning the federal income tax treatment of certain disability and death
benefits paid pursuant to Statute and sections 6.1, 6.2 and 9.3 of the Plan.

Taxpayer adopted the Plan pursuant to Statute to provide certain benefits for police
officers employed by Taxpayer who are disabled due to an accident or to another cause
in the line-of-duty. Sections 6.1 and 6.2 of the Plan provide that a police officer disabled
in the line-of-duty will receive a monthly disability benefit equal to 50% of the
employee’s final average compensation for the period of disability once unused annual
or sick leave has been paid to the disabled police officer, as reduced by any amounts
paid as State workers compensation benefits. Section 6.5 of the Plan provides that the
actuarial equivalent value of the disability benefit shall not be less than the participant’s
retirement value, or accumulated value of the employee and employer’s contribution
account, at the date of disability. Section 6.1 of the Plan provides that a participant
receiving a disability benefit shall not be entitled to any other benefits, including death
benefits, provided under the Plan unless the disability ends prior to death and the
participant’s retirement value has not been fully paid as a disability benefit.

Section 9.3(b) of the Plan provides that if a police officer dies in the line-of-duty, or if
death is caused by injuries received in the line-of-duty, a monthly benefit equal to 50%

PLR-124976-17 2

of the employee’s final average compensation at the time of death shall be paid to any
surviving spouse, or upon his or her remarriage or death, to the minor children. This
amount is reduced for amounts paid as State workers compensation benefits. Section
9.3(c) of the Plan provides that to the extent that the police officer’s retirement value at
the date of death exceeds the amount required to provide a monthly benefit equal to
50% of the employee’s final average compensation at the time of death, as reduced by
any amounts paid as State workers compensation benefits, the excess shall be paid to
the participant’s surviving spouse or minor children as described above.

Under State law, the parties may specifically provide in a domestic relations order that
the former spouse will receive a share of a disability benefit, and the Taxpayer will
follow that direction.

Section 61(a) of the Code provides that, except as otherwise provided, gross income
means all income from whatever source derived, including compensation for services.

Section 72(a) of the Code provides that, except as otherwise provided, gross income
includes any amount received as an annuity (whether for a period certain or during one
or more lives) under an annuity, endowment or life insurance contract.

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
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. Section 1.104-1(b) of
the regulations also states that section 104(a)(1) applies to compensation which is paid
under a workmen’s compensation act to the survivor or survivors of a deceased
employee.

In Revenue Ruling 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.

PLR-124976-17 3

Any excess over 60 percent of final average compensation was attributable to length of
service, and therefore, not excludible from gross income. Rev. Rul. 80-44 also holds
that benefits of the surviving spouse which are a continuation of the employee’s benefits
are excludible under section 104(a)(1) of the Code in the same percentage as the
employee's benefits were excludible.

Rev. Rul. 80-84, 1980-1 C.B. 35, 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.
The ruling also stated that a statute authorizing benefits for employees' survivors may
qualify as a statute in the nature of a workmen's compensation act if it requires as a
prerequisite to payment a determination that the cause of the employee's death was
service-related. The ruling concluded that survivor benefits are excludable from gross
income under section 104(a)(1) of the Code if the recipient can establish that the
benefits are received under the service-connected death provisions.

Rev. Rul. 85-104, 1985-2 C.B. 52, considered a statute under which the participants
who were disabled due to work-related injury or sickness, receive the greater of a fixed
percentage of base salary or an amount computed on the basis of years of service. The
ruling concluded that an amount up to the percentage of base salary specified by the
statute would be excludible from the participant’s gross income under section 104(a)(1)
of the Code but that any excess, computed on the basis of length of service, would not
be excludible under section 104(a)(1). The ruling also concluded that if benefits are
computed by a formula that does not refer to the employee's age, length of service, or
prior contributions and are provided to a class that is restricted to employees with
service-incurred injuries, then the benefits are payment for those injuries, and the
statute under which the benefits are paid qualifies as a statute in the nature of a
workmen's compensation act.

Benefits are paid under the Statute and the Plan where the disability is the result of an
accident or other cause which occurred as a result of the employee’s work in the line-of-
duty, or where death is caused by injuries received in the line-of-duty, and are thus in
the nature of workmen’s compensation. To the extent the actuarial equivalent value of
the disability benefit or death benefit is less than the retirement value, the excess would
be includible as taxable gross income under section 72 of the Code.

Section 104(a)(1) is strictly construed in a manner consistent with section 61, which
provides that all income is included in gross income unless explicitly excluded. The
line-of-duty disability payments are specifically paid to employees under the Plan for
their line-of-duty disabilities. Moreover, section 1.104-1 of the regulations explicitly
limits the exclusion from income to employees and their survivors. Neither the Code nor
the regulations provide an exclusion from income for amounts paid to former spouses
pursuant to a domestic relations order. See, Fernandez v. Commissioner, 138 T.C. 378
(2012).

PLR-124976-17 4

Based on the representations made by Taxpayer and the authorities cited above, we
conclude as follows:

(1) Benefits paid to a police officer under the Plan for injuries incurred in the line-of-duty
will not be gross income to the recipient under section 104(a)(1) to the extent that the
benefits do not exceed 50% of the employee’s final average compensation. Any portion
of the benefit that exceeds that amount will be gross income to the recipient under
section 72 of the Code.

(2) Benefits paid under the Plan to a survivor of a police officer that dies in the line-of-
duty, or if death is caused by injuries received in the line-of-duty, will not be gross
income to the recipient under section 104(a)(1) to the extent that the benefits do not
exceed 50% of the employee’s final average compensation. Any portion of the benefit
that exceeds that amount will be gross income to the survivor under section 72 of the
Code.

(3) Disability benefits and line-of-duty death benefits paid under the Plan to former
spouses of police officers pursuant to eligible domestic relations orders are not
excludable from the taxable income of former spouses under section 104(a)(1) of the
Code.

Except as expressly provided herein, 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,

                                       /s/

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

cc: