Rev. Rul. 72-191

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in I.T. 4010, C.B. 1950-1, 30 (which was limited by I.T. 4075 and further modified by Revenue Ruling 130); I.T. 4060, C.B. 1951-2, 11 (which was modified by I.T. 4107, C.B. 1952-2, 73, and fully reinstated by Revenue Ruling 60-184, C.B. 1960-1, 681); I.T. 4075, C.B. 1952-1, 13 (which was modified by Revenue Ruling 130); Revenue Ruling 130, C.B. 1953-2, 99; and Revenue Ruling 257, C.B. 1953-2, 15.

In the New York Workmen's Compensation Law (Sections 50-401 of Book 64, McKinney's Consolidated laws of New York Annotated (1965)), Article 9, sections 200-249 (known as the disability benefits law) requires that contributions be made by certain employers and their respective employees to a fund to provide for the payment of nonoccupational disability benefits to eligible individuals, and that specified disability benefits be paid from the resources provided by these funds to those individuals who qualify under the disability benefits law for such payments.

The questions presented relate to the tax treatment of both the employer and the employee with respect to (1) contributions to such fund required of the employer and paid by him, and (2) contributions to such fund required of the employee but paid by the employer; and the tax treatment of both the payor and the recipient of the disability benefit payments arising from these contributions under Article 9 of the Workmen's Compensation Law.

The pertinent provisions of the New York Workmen's Compensation Law are set out below.

Section 201. Definitions.

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9. "Disability" during employment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the regular duties of his employment or the duties of any other employment which his employer may offer him at his regular wages and which his injury or sickness does not prevent him from performing. "Disability" during unemployment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the duties of any employment for which he is reasonably qualified by training and experience.

10. "Benefits" means the money allowances during disability payable to an employee who is eligible to receive such benefits, as provided in this article.

11. "Carrier" shall include: the state fund, stock corporations, mutual corporations and reciprocal insurers which insure the payment of benefits provided pursuant to this article; and employers and associations of employers or of employees and trustees authorized or permitted to pay benefits under the provisions of this article.

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Sec. 204. Disability During Employment.

1. Disability benefits shall be payable to an eligible employee for disabilities commencing after June thirtieth, nineteen hundred fifty, beginning with the eighth consecutive day of disability and thereafter during the continuance of disability * * *.

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Sec. 207. Disability While Unemployed.

1. Employees entitled to unemployment insurance benefits. An employee whose employment with a covered employer is terminated and who during a period of unemployment within twenty-six weeks immediately following such termination of employment shall become ineligible for benefits currently being claimed under the unemployment insurance law solely because of disability commencing after June thirtieth, nineteen hundred fifty, and who on the day such disability commences is not employed or working for remuneration or profit and is not then otherwise eligible for benefits under this article, shall be entitled to receive disability benefits as herein provided for each week of such disability for which week he would have received unemployment insurance benefits if he were not so disabled. * * *

2. Employees not eligible for unemployment insurance benefits. An employee whose employment with a covered employer is terminated and who was in employment of one or more covered employers and was paid wages of at least thirteen dollars in such employment in each of twenty calendar weeks during the thirty calendar weeks immediately preceding the date he last worked for such covered employer, and who during a period of unemployment within twenty-six weeks immediately following such termination of employment is not eligible to benefits under the unemployment insurance law because of lack of qualifying wages but who during unemployment has evidenced his continued attachment to the labor market, shall be eligible for benefits under the provisions of this subdivision for disability commencing after June thirtieth, nineteen hundred fifty. If such employee becomes disabled and continues to be disabled for at least eight consecutive days during such twenty-six week period and on the day such disability commences he is not employed or working for remuneration or profit and is not then otherwise eligible for benefits under this article, he shall be entitled to receive disability benefits, as herein provided, beginning with the eighth consecutive day of such disability, for each week of such disability thereafter. * * *

3. Payment of benefits. The benefits payable under this section shall be subject to the provisions and limitations generally applicable to disability benefits payable under this article, and shall be paid by the chairman out of any assets in the fund created by section two hundred fourteen. * * *

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Sec. 209. Contribution of Employees for Disability Benefits.

1. Every employee in the employment of a covered employer shall, on and after January first, nineteen hundred fifty, contribute to the cost of providing disability benefits under this article, to the extent and in the manner herein provided.

2. The special contribution of each such employee to the accumulation of funds to provide benefits for disabled unemployed shall be as provided in subdivision one of section two hundred fourteen.

3. The contribution of each such employee to the cost of disability benefits provided by this article shall be one-half of one per centum of the employee's wages paid to him on and after July first, nineteen hundred fifty, but not in excess of thirty cents per week.

4. Notwithstanding any other provision of law, the employer is authorized to collect from his employees, except as otherwise provided in any plan or agreement under the provisions of subdivisions four or five of section two hundred eleven, the contribution provided under subdivisions two and three, through payroll deductions. If the employer shall not make deduction for any payroll period he may thereafter, but not later than one month after payment of wages, collect such contribution through payroll deduction.

5. In collecting employee contributions through payroll deductions, the employer shall act as the agent of his employees and shall use the contributions only to provide disability benefits as required by this article. * * *

Sec. 210. Employer Contributions.

1. Every covered employer shall, on and after January first, nineteen hundred fifty, contribute the cost of providing disability benefits in excess of the contributions collected from his employees, to the extent and in the manner provided in this article.

2. The special contribution of each covered employer to the accumulation of funds to provide benefits for disabled unemployed shall be as provided in subdivision one of section two hundred fourteen.

3. The contribution of every covered employer to the cost of providing disability benefits after June thirtieth, nineteen hundred fifty, shall be the excess of such cost over the amount of the contributions of his employees.

4. No profit shall be derived by any employer or association of employers or of employees from providing payment of disability benefits under this article. All funds representing contributions of employers and employees, and increments thereon, held by employers or associations of employers or of employees authorized or permitted to pay benefits under the provisions of this article, and by trustees paying benefits under plans or agreements meeting the requirements of section two hundred eleven, shall be trust funds and shall be expended only to provide for the payment of benefits to employees and for the costs of administering this article and for the support of the fund established under section two hundred fourteen.

Sec. 211. Provision for Payment of Benefits.

A covered employer shall, with his own contributions and the contributions of his employees, provide disability benefits to his employees in one or more of the following ways:

1. by insuring and keeping insured the payment of such benefits in the state fund, or

2. by insuring and keeping insured the payment of such benefits with any stock or mutual corporation or reciprocal insurer authorized to transact the business of accident and health insurance in this state, or

3. by furnishing satisfactory proof to the chairman of his financial ability to pay such benefits, in which case the chairman shall require the deposit of such securities as the chairman may deem necessary * * * or the filing of the bond of a surety company authorized to do business in this state, conditioned on the payment by the employer of his obligations under this article and in form approved by the chairman. * * * The chairman shall have authority to deny an application to provide benefits pursuant to this subdivision or to revoke approval at any time for good cause shown. * * *

4. by a plan in existence on the effective date of this article. * * * The chairman may require that the employer shall enter into an agreement in writing with the chairman that he will pay the assessments * * * and that until he shall have filed written notice with the chairman of his election to terminate such plan or agreement or to discontinue making necessary contributions to its cost, he will continue to provide for the payment of the disability benefits under such plan or agreement.

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5. by a new plan or agreement. * * * Any such plan or agreement shall continue until written notice filed with the chairman of intention to terminate such plan or agreement, and any modification of such plan or agreement shall be subject to the written approval of the chairman.

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Sec. 213. Non-Compliance or Default.

Whenever a covered employer does not comply with this article by providing for the payment of disability benefits to his employees in one or more of the ways provided in section two hundred eleven or whenever a carrier fails to pay the benefits required by this article to employees of a covered employer, then such employer shall be fully and directly liable to each of his employees for the payment of benefits provided by this article. The amount of the benefits to which employees of such employers are entitled under this article and attendance fees of their attending physicians or attending podiatrists fixed pursuant to subdivision two of section two hundred thirty-two shall, on order of the chairman, be paid out of the fund established under section two hundred fourteen. * * *

Sec. 214. Special Fund for Disability Benefits

There is hereby created a fund which shall be known as the special fund for disability benefits to provide for the payment of disability benefits under sections two hundred seven, two hundred thirteen and attendance fees under subdivision two of section two hundred thirty-two of this article.

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Section 61 of the Internal Revenue Code of 1954 defines gross income as all income from whatever source derived, except as otherwise provided.

Section 105(a) of the Code provides that, except as otherwise provided in section 105, there shall be included in gross income amounts received by an employee through accident or health insurance for personal injuries or sickness to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

Section 105(d) of the Code provides that gross income does not include amounts, subject to certain limitations, which constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness.

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 injuries or sickness.

Section 3402(a) of the Code requires every employer making payment of wages to deduct and withhold upon such wages a tax determined in accordance with the rules provided.

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

With respect to the covered employer's contribution toward the provision of nonoccupational disability benefits for his employees pursuant to Article 9 of the New York Workmen's Compensation Law, it is held that such payment is a contribution to an accident or health plan, whether it is accomplished by contribution to the State insurance fund, by contract with a commercial insurer, or by an approved self-insured plan (the employer's contribution may, under some circumstances, take the form of a disability benefit payment direct to the employee), and regardless of whether the contribution is one required of the employer under section 210 of the Workmen's Compensation Law, or one required of employees by section 209 of the law but voluntarily assumed and paid by the employer. Accordingly, such contributions made by an employer to provide for the payment of nonoccupational disability benefits to eligible individuals are excludable from the gross income of the covered employees under section 106 of the Code.

Because such contributions are not wages paid to the employee, the employer is not required to withhold income tax at source on such amounts under section 3402 of the Code.

However, such contributions are ordinary and necessary business expenses deductible by the employer under section 162 of the Code.

With respect to the tax treatment of the disability benefit payment in the hands of the recipient, the fact that the State of New York for its own reasons placed its nonoccupational benefits provisions within the confines of its Workmen's Compensation Law is not determinative of what is or is not workmen's compensation for purposes of section 104(a)(1) of the Code. Workmen's compensation acts have been understood to encompass only occupational disability or injuries. Therefore, the nonoccupational disability benefits paid pursuant to Article 9 of the New York Workmen's Compensation Law are not excludable from the gross income of recipients as amounts received "under workmen's compensation acts."

Such payments are "amounts received through accident or health insurance" which, if received by an employee, are includible in gross income (except as otherwise provided in section 105 of the Code) to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

Accordingly, it is held that these nonoccupational disability benefit payments to employees, whether made from the State insurance fund, by an insurance company pursuant to an insurance contract, or under an approved self-insured plan are includible in the gross income of the recipients unless they qualify for exclusion as amounts received under a wage continuation plan under section 105(d) of the Code.

I.T. 4010, I.T. 4060, and I.T. 4075 are hereby superseded, since the positions stated therein are restated under the current law in this Revenue Ruling; as are also Revenue Ruling 130 and Revenue Ruling 257, the holdings of which are reaffirmed and restated herein.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.