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Rev. Rul. 54-1

Rev. Rul. 54-1; 1954-1 C.B. 29

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Citations: Rev. Rul. 54-1; 1954-1 C.B. 29

Rev. Rul. 54-1

Advice is requested whether nonoccupational disability benefits received by employees under a self-insured plan, established by an employer in compliance with the New York State Disability Benefits Law under which (1) the benefits paid are closely correlated to regular wages, (2) employees contribute only a part of the cost of the benefits, and (3) there is no separate entity into which the employer pays specified sums in advance and from which employees receive benefits, are excludable from the gross income of the recipients as accident or health insurance under section 22(b)(5) of the Internal Revenue Code.

In the case under consideration regular salaried and hourly employees who are necessarily absent from work because of illness or accident, other than absences covered by workmen's compensation laws, receive cash benefits which equal regular wages or one-half of regular wages for a stated maximum period. The employer deducts from its employees' regular payroll the amounts authorized under the State law as employee contributions. These amounts are credited on the employer's books to the Employees' Trust Fund for New York State Disability Law, and this account is charged with the amounts paid as disability benefits to employees. The cost of the benefits in excess of employee contributions is paid by the employer.

Section 22(b)(5) of the Code provides in part as follows:

"(b) EXCLUSIONS FROM GROSS INCOME.--The following items

shall not be included in gross income and shall be exempt from

taxation under this chapter [chapter 1 of the Code]:

* * * * * * *

(5) COMPENSATION FOR INJURIES OR SICKNESS.--Except in

the case of amounts attributable to (and not in excess of)

deductions allowed under section 23(x) in any prior taxable

year, amounts received, through accident or health

insurance * * * as compensation for personal injuries or

sickness * * *."

An examination of the facts in the instant case does not reveal the existence of insurance within the meaning of section 22(b)(5), supra. See G. C. M. 23511, C. B. 1943, 86. The fact that a plan complies with State law does not by itself make the plan one of insurance. See I.T. 4107, C. B. 1952-2, 73. The contribution of only a part of the cost of the benefits by the employees does not in itself convert a plan into insurance. In Revenue Ruling 208, C. B. 1953-2, 102, the employee contributions covered the entire cost of the benefits paid. Further, the benefits paid under the instant plan are closely correlated to the regular wages of the covered employees and not to the degree of disability. There is no arrangement apart from normal payroll procedure, such as a fund, trust, or association, under which the employer, as well as the employees, contributes specified sums in advance and from which disability benefits will at some future time be paid. Although the books of the employer reflect a credit to a trust fund account, as a matter of fact, the employer has not established an independent entity for the administration of this program. There is nothing to distinguish the benefits received under the instant plan from the continuation of regular compensation in whole or in part during a period of disability. See Rev. Rul. 209, C. B. 1953-2, 104. In view of the foregoing, it is held that the plan of the instant employer is not a plan of insurance within the purview of section 22(b)(5) of the Internal Revenue Code.

For the extent to which benefits received under such plan are subject to Federal income tax and to withholding, see Rev. Rul. 54-2, page 30, this Bulletin.

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