Rev. Rul. 56-632

Advice has been requested whether premiums paid by an employer on a policy providing hospital and surgical services for certain of its employees may be considered a business expense and yet not be subject to the withholding of income tax.

In the instant case, an employer paid premiums on policies for hospital and surgical services for those of its employees who were not eligible to be covered by the health and welfare plan covering its union members.

Section 162 of the Internal Revenue Code of 1954 provides that there shall be allowed as deductions all the ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business.

Section 106 of the Code provides that gross income does not include contributions by the employer to accident or health plans for compensation (through insurance or otherwise) to his employees for personal injury or sickness. Section 1.106-1 of the Income Tax Regulations further provides that the employer may contribute to an accident or health plan by paying the premium (or a portion of the premium) on a policy of accident or health insurance covering one or more of his employees; however, if such insurance policy provides other benefits in addition to accident or health benefits, section 106 of the Code applies only to the portion of the employer's contribution which is allocable to accident or health benefits.

Accordingly, it is held that (1) an arrangement whereby an employer provides hospital and surgical services under insurance policies for employees, who do not come under its health and welfare plan covering its union employees, constitute a plan within the meaning of section 106 of the Code; (2) the amount of premiums paid for such policies by the employer does not constitute income to the employees covered under the plan; (3) such amounts are not subject to the withholding of income tax; and (4) the amount of such premiums paid by the employer constitute ordinary and necessary business expenses of the employer which are deductible under section 162 of the Internal Revenue Code of 1954.