Payments by qualified retirement plans for accident or health insurance will be taxable distributions to participants in most cases, starting with the 2015 tax year, according to new IRS final regulations. Retirees are excluded from having to pay tax on plan payments for medical benefits, however.
IRS on May 6 approved amendments to 26 C.F.R. Part 1 that clarify that under tax Code Section 402(a), amounts held in a qualified plan to pay such benefit premiums can be taxed for recipients. The regulations, titled “Tax Treatment of Qualified Retirement Plan Payment of Accident or Health Insurance Premiums,” were first proposed in August 2007 as 72 Fed. Reg. 46421 in the Federal Register.
The tax code generally excludes from gross income payments received from accident or health insurance for injuries or sickness, but that exclusion does not cover contributions paid by an employer for the insurance.
The final regulations do not make taxable premiums for disability insurance that replaces retirement plan contributions if a participant is disabled, said a copy of the regulations posted in the May 12 Federal Register. The regulations will be effective on that date.
The notice said taxpayers also may apply the regulations to earlier taxable years.
Conditions for Paying Retiree Health Premiums
For retirees and their beneficiaries, certain conditions must be met for a retirement plan to provide payments for health insurance, including: (1) aggregate contributions for these benefits must equal no more than 25 percent of total plan contributions ; (2) a separate account must be established for such benefits; and (3) limitations are placed on the accounts of key employees.
The regulations also said amounts received as annuities will be included in participants’ gross income, although some portion of annuity distributions can be excluded as a recovery of the participant’s investment in an annuity contract (generally the amount of unrecovered after-tax employee contributions) under a qualified employer retirement plan.
IRS said payment of a health benefit premium from unallocated contributions or forfeitures in a plan also will be considered a taxable distribution.
The announcement also recalled that, under IRS Revenue Ruling 2003-62, amounts distributed from a qualified plan to pay health insurance premiums under a cafeteria plan can be included in the recipient’s gross income. That ruling also holds that plan distributions to reimburse participant medical expenses are taxable as part of gross income.
IRS on its website said if an employer pays the cost of an accident or health insurance plan — outside payment from a retirement plan — for employees and their spouse and dependents, the payments are not wages and are not subject to Social Security; Medicare; or federal unemployment, or FUTA, taxes; or federal income tax withholding. Generally, this exclusion also applies to qualified long-term care insurance contracts.
1 thought on “Accident, Health Premiums Paid by Retirement Plans Become Taxable in 2015”