Rev. Rul. 75-479

Advice has been requested regarding the status, for Federal income tax purposes, of benefit payments received under the Temporary Disability Insurance Law of the State of Hawaii, Hawaii Rev. Stat. sections 392-1 through 392-101 (Supp. 1974).

Under section 392-2 of the Hawaii Revised Statutes, an employer must provide for compensation for the wage loss of his employees caused by disabling nonoccupational sickness or accident when the disability is temporary in nature and exceeds the period of one workweek. Under section 392-43(a), an employer may deduct from the wages of each employee one-half of the cost (not to exceed a specified percentage of the weekly wages earned by the employee in employment) and the employer must furnish the balance of the cost of providing the benefits.

Benefit payments may be made (1) by direct payment by an approved self-insured employer, (2) through the employer's insurer, or (3) through an existing or new plan (Hawaii Rev. Stat. section 392-41(a)); or (4) from a State fund to which the employers regularly contribute, if the employer cannot pay the benefit because of bankruptcy or failure to comply with the disability law or if an unemployed individual is ineligible to receive unemployment compensation by reason of disability (section 392-65).

Temporary disability benefits are the only benefits considered in this Revenue Ruling. No such benefits from any source are payable if the employee is entitled to receive benefits under other laws of the State or other states, as, for example, under workmen's compensation laws (Hawaii Rev. Stat. section 392-28). Such temporary disability benefits paid to an employee by the employer, the employer's insurer, or the State fund as a result of the employer's inability or failure to pay, are payable for a maximum of 26 weeks (section 392-23), and are limited by the average wage in the State (section 392-22(2)). Such temporary disability benefits paid to an unemployed individual from the State fund are determined in amount under the unemployment compensation laws of the State and are payable only for the remaining period that the unemployed individual could have received unemployment compensation had the individual not become disabled (section 392-66).

Section 61 of the Internal Revenue Code of 1954 provides that gross income includes 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, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent that such amounts (1) are attributable to contributions by the employer that were not includible in the gross income of the employee, or (2) are paid by the employer. Section 105(e) provides, in part, that amounts received from a sickness or disability fund for employees maintained under the law of a state are treated as amounts received through accident and health insurance for purposes of sections 105 and 104.

Section 105(d) of the Code provides, in part, that, subject to certain limitations, gross income does not include amounts received as 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 104(a)(3) of the Code excludes from gross income, without limitation, amounts received through accident or health insurance for personal injuries or sickness, other than amounts included in gross income under section 105(a).

Section 1.105-1(c)(1) of the Income Tax Regulations provides, in part, that in the case of amounts received by an employee through an accident or health plan that is financed partially by an employer and partially by contributions of the employee, section 105(a) of the Code applies to the extent that such amounts are attributable to contributions of the employer that were not includible in the employee's gross income.

The specific question to be resolved is the taxable status, for Federal income tax purposes, of the temporary disability benefit payments to an unemployed individual, and to an employee.

In the case of an unemployed individual, the temporary disability benefit payments received from the State fund are in the same weekly amount as the unemployment benefits to which the individual would be entitled but for the disability. Moreover, the unemployed individual receives the disability payments only for the unexpired period of unemployment compensation entitlement. Therefore, such payments are not compensation for loss of wages, but rather a substitute for lost unemployment benefits. Rev. Rul. 70-280, 1970-1 C.B. 13, holds that payments on account of unemployment paid by a state agency out of funds received from the Federal Unemployment Trust Fund are not includible in the gross income of the recipients. Since the temporary disability benefit payments received by an unemployed individual from the State fund are in the nature of unemployment compensation, they are likewise excludable from the gross income of the recipient.

In the case of an employee, the temporary disability benefit payments received, whether from the employer or the employer's plan, from an insurance company, or from the State fund, are paid pursuant to a wage continuation plan for a period during which the employee is absent from work on account of personal injuries or sickness. Accordingly, such benefits received by an employee (1) are excludable from gross income in accordance with section 105(d) of the Code to the extent attributable to contributions of the employer that were not includible in the employee's gross income and (2) are excludable from gross income under section 104(a)(3) to the extent attributable to the employee's own contribution. See sections 1.105-1(c)(1), (c)(2), (d), and (e) of the regulations for attribution rules.