Rev. Rul. 57-33

Advice has been requested relative to the applicability of the taxes imposed by the Federal Insurance Contricutions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23 and 24, respectively, subtitle C, Internal Revenue Code of 1954), to payments made by member employers of an employers' association to employees for use in the purchase of hospitalization and surgical insurance coverage.

Pursuant to the contract of employment entered into between the association on behalf of its members and the employees' union, the member employers are required to pay a stipulated sum weekly to each employee covered by the agreement for the purchase of individual hospitalization and surgical insurance coverage. Where less than a full week is worked, the agreed-upon amount is prorated on a percentage basis per shift worked. It is further agreed that in lieu of these weekly payments the member employers may provide individual hospitalization and surgical insurance benefits to their union employees under a company plan, provided written notice is given to the union.

As specifically agreed to by the parties concerned, the payment of the sum per week is for the express purpose of purchasing the hospitalization and surgical insurance benefits for covered employees. Where member employers have no existing company program to cover their employees, the union assumes the responsibility of making sure that its members spend the weekly payment for such benefits. The union has made direct arrangements with a hospital service for this purpose and in no instance are payments under the contract being made or used for a purpose other than providing the hospitalization and surgical insurance benefits.

For purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages, `wages' consist of all remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, with certain exceptions not here material.

The payments in the instant case are required under the terms of a labor agreement governing employee relations of the employers here involved, they are directly related to the units of services performed by the employees, and they are paid directly to the employees by the employers. Thus, they constitute a basic part of the compensation of each employee involved. Accordingly, it is held that such payments which are made by the employers directly to the employees constitute `wages' for `employment' for purposes of the Federal employment taxes (chapters 21, 23, and 24, supra ) and are includible in the gross income of the employees under section 61 of the 1954 Code.

The fact that the union assumes the responsibility for the disposition of such payments by the employees and the purchase of hospitalization and surgical insurance is immaterial.

In reaching these conclusions, consideration was given to S.S.T. 146, C.B. 1937-1, 443, S.S.T. 234, C.B. 1937-2, 458, and I.T. 3738, C.B. 1945, 90, which hold that the payments by the employers under the circumstances present in those rulings do not constitute wages. It is believed that the facts in the instant case are distinguishable from the facts and circumstances in those rulings and, therefore, justify the conclusions reached herein.