Rev. Rul. 55-74

Advice has been requested whether the words `welfare fund' and `trust' as used in section 39.22(b)(1)-2(b) of Regulations 118, relating to the exclusion from gross income of amounts up to $5,000 paid to employees' beneficiaries by an employer, are illustrative of the means by which benefits may be paid but not exclusive of other means of indirect payment, such as payments made under group annuity contracts.

Amounts paid as death benefits under group annuity contracts of the type here considered do not exceed the reserve (or accumulated premiums) with respect to the annuity benefits being funded for each covered employee, and are not life insurance within the purview of section 22(b)(1)(A), but may by excludable in an amount not in excess of $5,000 under section 22(b)(1)(B) if they meet the requirements of that section.

The exclusion from gross income provided by section 22(b)(1)(B) of the Internal Revenue Code of 1939, may apply in the case of a death benefit paid to the beneficiary of an employee under a group annuity contract if the payment is made pursuant to an express contract between the employer and the employee. Under section 39.22(b)(1)-2(c) of Regulations 118 an express contract is deemed to exist between an employer and an employee when there is an established plan of the employer (or program having the effect of a plan) communicated to his employees, which plan has not been rescinded before the death of an employee. For this purpose a group annuity contract, the terms of which have been communicated to the employees of an employer, is deemed to constitute an established plan, and a payment by an insurance company under such a contract is deemed to be made on behalf of the employer whose employees it covers.

The application of such exclusion, however, is subject to the provisions of section 39.22(b)(1)-2(d)(1) of Regulations 118, which distinguishes death benefits from amounts which do not qualify as such, such as uncollected salary, payments for unused leave, and amounts paid by or on behalf of an employer to the survivor of a deceased retired employee as a survivor's annuity, as follows:

(d)(1) The exclusion from gross income provided by this section is limited solely to those amounts paid by or on behalf of an employer which, by the terms of the contract with the employee or by the provisions of the plan providing for such payments, are specifically designated and intended as a death payment, paid only by reason of the death of the employee. The exclusion does not apply to amounts with respect to which the deceased employee possessed, immediately prior to his death, a nonforfeitable right to receive the amounts while living. * * *.

It is apparent that a payment to be excludable under section 22(b)(1)(B) of the Code must be a designated amount paid only by reason of the death of an employee.

In view of the foregoing, it is held that amounts not in excess of $5,000, paid under a group annuity contract of the type here considered by an insurance company on behalf of an employer to the beneficiary of a deceased employee, are excludible from the gross income of the beneficiary under section 22(b)(1)(B) of the Internal Revenue Code, if under the terms of the contract with the employee (not rescinded before death) or the provisions of the plan providing for such payments, the payment is specifically designated and intended as a death payment made only by reason of the death of the employee. The exclusion is not applicable, for instance, to a payment made upon death from the reserve under a group annuity contract which had been or would have been applied to purchase an immediate or deferred annuity for the employee to which he would have had a right in the event he had separated from the service of his employer immediately prior to his death