Service-connected survivor benefits qualify for income exclusion

Plain-English summary

A governmental plan pays disability and death benefits to eligible firefighters and police officers and may continue those benefits to surviving beneficiaries. The IRS ruled that payments continuing job-related disability benefits or providing service-connected death benefits are excluded from a survivor's gross income under Section 104(a)(1). The governing city provisions qualify as a statute in the nature of a workers' compensation act because eligibility depends on a service-connected disability or death and not on age, service, or employee contributions. Any amount exceeding the actuarial equivalent of the qualifying benefit, or determined by age, service, or prior contributions, is taxable under Section 72.

Ruling snapshot

• Question: Are service-connected disability and death benefits paid to surviving beneficiaries excluded from gross income?
• Outcome: Mixed. Qualifying survivor benefits are excluded, but excess or age-, service-, or contribution-based amounts are taxable.
• Key authorities: IRC §§ 72 and 104(a)(1); Treas. Reg. § 1.104-1(b); Rev. Ruls. 80-44, 80-84, and 85-104

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202111009 Third Party Communication: None
Release Date: 3/19/2021 Date of Communication: Not Applicable
Index Number: 104.00-00, 104.02-00
Person To Contact:
--------------------------- -------------------- , ID No. -----------------
------------- Telephone Number:
------------------------------------------------------------ --------------------
------- Refer Reply To:
---------------------------------- CC:EEE:EB:HW
------------------------------------- PLR-114327-20
Date:
December 22, 2020

Legend:

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

City = ----------------------------------

City Code = -------------------------------

Board of Trustees = -----------------------------------------------------------------------------------------

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

This responds to your letter, dated May 22, 2020, supplemented by letter dated
December 21, 2020, requesting a ruling regarding certain payments made to the
surviving beneficiary(ies) of a disabled member following his or her death.

FACTS

Taxpayer is a “governmental plan” as defined in section 414(d) of the Internal Revenue
Code (the “Code”) and section 3(32) of the Employee Retirement Income Security Act
of 1974, as amended. Taxpayer provides retirement and other benefits, including
disability and death benefits for members of Taxpayer who are certain eligible
firefighters and police officers in City. The statutes governing the payment of retirement
and disability benefits for Taxpayer are set forth in the City Code, -----------------------------
--------------------------.

Section -------------------- and the job-related disability provisions of Section ----------- of
the City Code provide that a member determined by the Board of Trustees to be
PLR-114327-20 2

disabled while engaged in the discharge of his or her duties will receive a disability
benefit and provides for the continuation of these benefits to the member’s surviving
beneficiary(ies). Section --------------- provides that the surviving spouse of a member
who was determined by the Board of Trustees to have been killed in the line of duty will
receive a death benefit. The eligibility of members and their surviving beneficiary(ies) for
disability and death benefits is made by the Board of Trustees in accordance with the
procedures set forth in Section -----------. Section ---------- provides that a member or
surviving beneficiary must make an application to the Board of Trustees for a job-related
disability or death benefit. Section ----------- provides that the member or surviving
beneficiary must provide the Board of Trustees with objective proof of disability
demonstrating that the member cannot perform the duties of a firefighter or police officer
and became disabled while engaged in the discharge of the member’s duties as a
firefighter or police officer, or was killed in the line of duty. The disability benefits under
Section ---------------, the job-related disability provisions of Section -----------, and the
death benefits under Section --------------- are determined without regard to the
member’s age, length of service, or prior employee contributions.

Section -------- of the City Code provides, in relevant part, that a member may elect to
have the disability benefits payable under Section -------- paid in an optional form of
payment under Section--------. Taxpayer represents that individuals who have been
determined to have a job-related disability under Section --------------- or Section -----------
--------- may elect to have the disability benefits paid under one of the optional forms of
payment set forth in Section -------- without regard to whether the member has satisfied
the age or service requirements set forth in Section --------. Section ----------- provides
that the optional forms of payment under Section--------- are the actuarial equivalent of
the disability benefit payable to the member based on the mortality assumptions
approved from time to time by the Board, and on the age of the member and the
beneficiary as of the date the member is eligible to make the election. These optional
forms of payment provide for the disability benefit payable to the member under Section
--------------- and Section------------ to be paid to the surviving beneficiary(ies) upon the
death of the disabled member.

RULING REQUESTED

Taxpayer requests a ruling that survivor benefits paid by Taxpayer to the beneficiaries
of deceased members under Section-------------------- and under the job-related disability
provisions of Section ----------- of the City Code are paid under a statute in the nature of
a workmen’s compensation act, are the continuation of payments to a member for a job-
related disability or death benefit for a member killed in the line of duty and, therefore,
are excluded from gross income under section 104(a)(1) of the Code.
PLR-114327-20 3

LAW

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 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.

Treas. Reg. § 1.104-1(b) provides 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. Treas. Reg. § 1.104-1(b) also provides this exclusion to compensation
paid under a workmen’s compensation act to the survivor or survivors of a deceased
employee. Treas. Reg. § 1.104-1(b) 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.

In Rev. Rul. 80-44, 1980-1 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. Rev. Rul. 80-44 held 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 percent of final average compensation was attributable to length of
service, and therefore not excludable from gross income. Rev. Rul. 80-44 also held that
benefits of the surviving spouse which are a continuation of the employee’s benefits are
excludable under section 104(a)(1) of the Code in the same percentage as the
employee’s benefits were excludable.

Rev. Rul. 80-84, 1980-1 C.B. 35, held 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. Rev. Rul. 80-84 also held that these benefits are excluded from gross
PLR-114327-20 4

income 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 statue 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 excludable 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 excludable under section 104(a)(1). The ruling also concluded that if the 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.

ANALYSIS AND CONCLUSION

Section -------------------- and the job-related disability provisions of Section ----------- of
the City Code, limit disability and death benefits to members or surviving
beneficiary(ies) that the Board of Trustees determined have incurred a disability while
engaged in the discharge of his or her duties or were killed in the line of duty. The
disability and death benefits are not determined on the basis of age, length of service,
or prior employee contributions, and are provided to a class that is restricted to
employees with service-connected injuries or sickness or killed in the line of duty.
Therefore, Section -------------------- and the job-related disability provisions of Section ---
--------- of City Code provide benefits under a statute in the nature of a workmen’s
compensation act.

Treas. Reg. § 1.104-1(b) provides that compensation paid under a workmen’s
compensation act to the survivor or survivors of a deceased employee is excluded from
gross income under section 104(a)(1) of the Code. Rev. Rul. 80-44 and Rev. Rul. 80-84
held that benefits to survivors were excludable from the beneficiaries’ gross income if
the payments were continuations of the payments to the deceased employee or are
received under the service-connected death provisions.

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

Payments to the surviving beneficiary(ies) of a deceased member under Sections --------
----------------- and the job-related disability provisions of Section ----------- of the City
Code that are a continuation of job related disability payments or are service-connected
death benefits are excluded from the gross income of a surviving beneficiary under
section 104(a)(1) of the Code and Treas. Reg. § 1.104-1(b).
PLR-114327-20 5

To the extent the benefits paid by Taxpayer to a survivor of a deceased member who
suffered a disability that arose out of and in the course of employment exceeds the
actuarial equivalent of the benefit payable under Section -------------------- and Section ---
--------- of the City Code, the excess is includible in gross income and taxable under
section 72 of the Code. In addition, any benefit payable to a surviving beneficiary that is
determined by reference to the member’s age, length of service, or prior employee
contributions, is includible in gross income and taxable under section 72 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 Treasury regulations
or the City Code, other than those specifically stated above.

This ruling is directed only to the party requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or citied as precedent.

The ruling contained in this letter is based upon representations submitted by Taxpayer.
While this office has not verified any of the material submitted in support of the request
for this ruling, it is subject to verification on examination.

                                       Sincerely,



                                       Denise Trujillo
                                       Chief, Health & Welfare Branch
                                       Office of Associate Chief Counsel
                                       (Employee Benefits, Exempt Organizations,
                                       and Employment Taxes)

cc: -----------------------