Rev. Rul. 75-241

Advice has been requested whether cash payments of health and welfare benefits to employees, under the circumstances described below, are "wages" for purposes of the Federal Insurance Contributions 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). Advice has also been requested whether the payments are includible in the gross income of the employees for Federal income tax purposes.

A contractor, performing a service contract for the United States Government, was required to pay health and welfare benefits to his employees on a parity with those prevailing in the locality where the services were performed pursuant to the Service Contract Act of 1965, as amended, 41 U.S.C.A., sections 351-358 (Supp. 1974). Under the Act, a contractor may elect to discharge this obligation by paying a cash amount to his employees in lieu of the specified health and welfare benefit. There is no requirement under the Act that the employer verify that the payments are used by employees to purchase health and welfare benefits.

The payments here under consideration were based on a specified rate for each hour the employee performed services for the contractor, and were made in cash either by including them in the employee's regular paychecks or by separate checks. The contractor made no attempt to verify that his employees actually purchased health and welfare benefits.

Section 3121(a) of the Federal Insurance Contributions Act and section 3306(b) of the Federal Unemployment Tax Act provide, with certain exceptions, that the term "wages" means all remuneration for employment. Section 3401(a) of the Code, relating to the withholding of income tax, contains a similar definition.

Sections 3121(a)(2) and 3306(b)(2) of the Acts except in part, from the term wages, that amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund to provide for any such payments) made to, or on behalf of, an employee under a plan or system established by an employer that makes provision for his employees generally on account of sickness or accident disability or medical or hospitalization expenses in connection with sickness or accident disability.

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.

Rev. Rul. 57-33, 1957-1 C.B. 303, holds that certain payments made by employers directly to employees pursuant to a union contract of employment, for the purpose of purchasing individual hospitalization and surgical insurance coverage, are wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages. In that Revenue Ruling, when member employers had no existing company program to cover their employees, the union assumed the responsibility of making sure that its members sent the weekly payment for such benefits. The union had made direct arrangements with a hospital service for this purpose and in no instance were the payments under the contract being made or used for a purpose other than providing the hospitalization and surgical insurance benefits. Nevertheless the Revenue Ruling stated that the fact that the union assumed the responsibility for the employees' disposition of such payments and the purchase of hospitalization and surgical insurance was immaterial. The payments were required under the terms of a labor agreement, were directly related to the units of service performed by the employees, and were paid directly to the employees by the employers. Thus, they were a basic part of the compensation of each employee involved.

Rev. Rul. 61-146, 1961-2 C.B. 25, holds that reimbursements by an employer to his employees for his share of premiums for hospital and medical insurance for them may be considered as contributions by the employer to accident or health plans for his employees so as to result in the exclusion of such payments from the gross income of the employees under section 106 of the Code. For those employees, in that case, not covered by the employer's group policy, but covered under other types of hospital and medical insurance for which they paid the premiums directly to the insurers, the employer paid a part of such premiums upon proof that the insurance was in force and was being paid for by the employees. Rev. Rul. 57-33 was distinguished since, under the facts in that case, the employers had no accident or health plan of their own in effect, and, with respect to the payments that they made directly to the employees, they did not require an accounting either by the employees or the employees' union that the funds were expended in the acquisition of insurance coverage.

Since the contractor in this case had no legal or contractual obligation to and did not verify that the cash payments were used by the employees to purchase health and welfare benefits, the employees had complete control of the disposition of the funds. Thus, the payments are attributable to service performed by the employees for their employer, although the employers paid the amounts in discharge of a requirement of a Federal statute that minimum fringe benefits in the form of health and welfare benefits be provided.

Accordingly, the payments in the instant case are wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages, and are includible in the gross income of the employees for Federal income tax purposes.

Rev. Rul. 61-146 is distinguished since in that case the employer either had an accident or health plan of his own or, with respect to the payments made directly to the employees, required an accounting to insure that the insurance was in force and was being paid for by the employees.