Rev. Rul. 57-178

Advice has been requested as to the income tax status of a pension received by reason of retirement on account of disability where the retired employee receives earned income from other sources (such as wages, commissions, or benefit from the operation of a business).

Subject to certain limitations, section 105(d) of the Internal Revenue Code of 1954 excludes from gross income amounts received by an employee pursuant to the provisions of a wage continuation plan if such amounts 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. The term `wage continuation plan' includes plans under which benefits are continued until the employee either is able to return to work or reaches retirement age. If a plan provides that an employee, who is absent from work on account of a personal injury or sickness, will receive a disability pension as long as he is disabled, section 105(d) is applicable to any payments which such an employee receives under this plan before he reaches retirement age. See section 1.105-4(a)(3)(i) of the Income Tax Regulations. With respect to the time at which employees reach retirement age for the purpose of excluding disability pension benefits, see Rev. Rul. 57-76, page 66 of this Bulletin. The determination of whether an employee is absent from work should be made in accordance with section 1.105-4(a)(4) and (5) of the Income Tax Regulations.

The amount which is paid to an employee as wages or payments in lieu of wages for a period of absence from work due to a personal injury or sickness is determined by reference to the plan under which the amount is paid. If a disability pension constitutes an amount which is excludable under section 105(d) of the Code, the fact that the employee engages in a gainful occupation either as a self-employed individual or as an employee of another employer does not require different treatment with respect to the disability pension, since the employee's absence from work with the employer providing the pension is not terminated by such other employment.

Accordingly, it is held that an employee, who is receiving a disability pension excludable from gross income subject to the limitations provided in section 105(d) of the Code, may be engaged in a gainful occupation as a self-employed individual or as an employee of another employer without affecting the tax treatment of his disability pension. However, such a course of conduct is a factor in determining whether the employee's absence was due to personal injury or sickness, or to some other reason.