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Treasury Issues Final Regulations on Taxability of Accident and Health Insurance Premiums Paid by Retirement Plans

Posted in Employer/Employee Matters, Legislation and Public Policy, Private Insurers, Tax Matters/IRS

On May 12, the Department of Treasury issued final regulations on the tax treatment of payments by qualified retirement plans for accident and health insurance. The final regulations stipulate that when a qualified retirement plan pays the premium of a participant’s accident or health insurance, that premium payment is a taxable distribution to the participant.

However, the final regulations provide a significant exception for premium payments for disability protection provided through insurance. If the benefit payable at disability does not exceed what otherwise would be contributed to the plan on the participant’s behalf for the year if the participant were not disabled, then the premium payments for that benefit do not constitute taxable distributions. This is a significant departure from the 2007 proposed regulations that would not have permitted disability protection to be provided through a qualified defined contribution plan.

While these final regulations are a welcome development, there are still many unanswered questions regarding the implementation of disability protection provided through qualified defined contribution plans, including, but not limited to, determining how large the disability payment can be. Since the regulations are not effective until tax years beginning on or after January 1, 2015, it might be prudent for employers to wait until further guidance is issued.

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