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Feds Say Most Retiree Health Contributions Are Taxable

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The Internal Revenue Service wants to make it clear that taxpayers cannot normally use retirement plan assets to pay for accident or health coverage on a tax-favored basis.

Taxpayers can use health savings accounts to pay for some future health benefits, and employers can pay for retiree health benefits through retiree health benefits plans that meet the requirements of sections 401(h) and 420 of the Internal Revenue Code, IRS officials write in a notice of proposed rulemaking.

But the IRS wants to draft regulations that “would clarify that a payment from a qualified [retirement] plan for an accident or health insurance premium generally constitutes a distribution…that is taxable to the distributee…in the taxable year in which the premium is paid,” officials write in the notice, which appears today in the Federal Register.

“The taxable amount generally equals the amount of the premium charged against the participant’s benefits under the plan,” officials write.

If a 401(k) plan or other defined contribution plan pays premiums from cash that has not yet been allocated to plan participants, the IRS will treat the cash used as if it had been allocated to the participants, officials write.

The proposed rule would continue to let profit-sharing plans pay for incidental life and health insurance for participants and participants’ relatives, officials write.

Section 402(a) [of the Internal Revenue Code “provides that amounts actually distributed from a qualified plan are generally taxable to the distributee in the year of the distribution,” IRS officials write. “There is no general exception in Section 402 for a distribution in the form of accident or health insurance.”

The IRS believes that Congress has carefully limited taxpayers’ ability to use retirement plan assets to pay for accident or health coverage on a tax-favored basis, officials write.

A copy of the IRS notice of proposed rulemaking is on the Web


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