Fringe Benefits

<div class="Section1"><br /> <br /> As a general rule, a participant in a cafeteria plan is not treated as being in constructive receipt of taxable income solely because he or she has the opportunity &ndash; before a cash benefit becomes available &ndash; to elect among cash and &ldquo;qualified&rdquo; benefits (generally, nontaxable benefits).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A participant must elect the qualified benefits before the cash benefit becomes currently available in order to avoid taxation.&nbsp;That is, the election must be made before the specified period for which the benefit will be provided begins&mdash;generally, the plan year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A cafeteria plan may, but is not required to, provide default elections for one or more qualified benefits for new employees or for current employees who fail to timely elect between permitted taxable and qualified benefits.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Benefits provided under a cafeteria plan through employer contributions to a health flexible spending arrangement (FSA) are not treated as qualified unless the plan provides that an employee may not elect to have salary reduction contributions in excess of $2,500 (this amount is indexed annually for inflation, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8902">8902</a>) made to the FSA for any tax year.<a href="#_ftn4" name="_ftnref4">⁴</a> Under IRS Notice 2012-40:<br /> <blockquote>(1)&nbsp; the $2,500 contribution limit did not apply for plan years that begin before 2013;<br /> <br /> (2)&nbsp; the term &ldquo;taxable year&rdquo; in IRC Section&nbsp;125(i) refers to the plan year of the cafeteria plan, as this is the period for which salary reduction elections are made;<br /> <br /> (3)&nbsp; plans could adopt the required amendments to reflect the contribution limit at any time through the end of calendar year 2014;<br /> <br /> (4)&nbsp; in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the contribution limit for the subsequent plan year; and<br /> <br /> (5)&nbsp; unless a plan&rsquo;s benefits are under examination by the IRS, relief is provided for certain salary reduction contributions exceeding the contribution limit that are due to a reasonable mistake and not willful neglect, and that are corrected by the employer.</blockquote><br /> Under IRS Notice 2013-71, heath FSAs may now be amended so that $500 ($660 in 2025, $640 in 2024; $610 in 2023 and $570 in 2022) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carry forward provision may not also offer the grace period that would otherwise allow FSA participants an additional period after the end of the plan year to exhaust account funds.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;125; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-2(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;125(i).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Notice 2013-71, 2013-47 IRB 532.<br /> <br /> </div></div><br />

<p> As a general rule, a participant in a cafeteria plan is not treated as being in constructive receipt of taxable income solely because he or she has the opportunity – before a cash benefit becomes available – to elect among cash and "qualified" benefits (generally, nontaxable benefits).<a href="#_ftn1">¹</a>A participant must elect the qualified benefits before the cash benefit becomes currently available in order to avoid taxation. That is, the election must be made before the specified period for which the benefit will be provided begins—generally, the plan year.<a href="#_ftn2">²</a></p><p> A cafeteria plan may, but is not required to, provide default elections for one or more qualified benefits for new employees or for current employees who fail to timely elect between permitted taxable and qualified benefits.<a href="#_ftn3">³</a></p><p> Benefits provided under a cafeteria plan through employer contributions to a health flexible spending arrangement (FSA) are not treated as qualified unless the plan provides that an employee may not elect to have salary reduction contributions in excess of $2,500 (this amount is indexed annually for inflation, see Q <a href="javascript:void(0)">8902</a>) made to the FSA for any tax year.<a href="#_ftn4">⁴</a> Under IRS Notice 2012-40: <br>(1) the $2,500 contribution limit did not apply for plan years that begin before 2013;</p><p>(2) the term "taxable year" in IRC Section 125(i) refers to the plan year of the cafeteria plan, as this is the period for which salary reduction elections are made;</p><p>(3) plans could adopt the required amendments to reflect the contribution limit at any time through the end of calendar year 2014;</p><p>(4) in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the contribution limit for the subsequent plan year; and</p><p>(5) unless a plan's benefits are under examination by the IRS, relief is provided for certain salary reduction contributions exceeding the contribution limit that are due to a reasonable mistake and not willful neglect, and that are corrected by the employer.</p><p> Under IRS Notice 2013-71, heath FSAs may now be amended so that $500 ($640 in 2024; $610 in 2023 and $570 in 2022) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carry forward provision may not also offer the grace period that would otherwise allow FSA participants an additional period after the end of the plan year to exhaust account funds.<a href="#_ftn5">⁵</a></p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">1</a>. IRC § 125; Prop. Treas. Reg. § 1.125-1. </p><p><a href="#_ftnref2">2</a>. Prop. Treas. Reg. § 1.125-2. </p><p><a href="#_ftnref3">3</a>. Prop. Treas. Reg. § 1.125-2(b). </p><p><a href="#_ftnref4">4</a>. IRC § 125(i). </p><p><a href="#_ftnref5">5</a>. Notice 2013-71, 2013-47 IRB 532. </p>

<div class="Section1">Generally, certain employee achievement awards granted by an employer to recognize the employee's length of service or safety achievements are not taxable to the employee and are deductible by the employer. Under the 2017 tax reform legislation, certain awards are excluded from this treatment, including cash, cash equivalents, gift certificates, vacations, meals, lodging, tickets to sports or theater events, stocks, bonds, securities and other similar items.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> This essentially means that employee achievement awards must be received in the form of tangible personal property in order to receive favorable tax treatment. These provisions are effective for tax years beginning after December 31, 2017.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 74, 274(j)(3).<br /> <br /> </div>

<div class="Section1">In addition to meeting all of the requirements of IRC Section&nbsp;401(a) and the requirements outlined below, employee stock bonus plans must meet certain distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8918">8918</a>) and voting ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8919">8919</a>) requirements as to employer stock that is held by the plan.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> If the employer securities held within the plan are not readily traded on a public market, any transactions involving stock require an independent valuation of the stock for that transaction. A stock bonus plan generally is required to give participants the right to demand benefits in the form of employer securities. If employer securities are not readily tradable on an established market, the participant must be given the right to require the employer (not the plan) to repurchase employer securities under a fair valuation formula (a &ldquo;put option&rdquo;).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The requirement that participants have the right to demand benefits in the form of employer securities does not apply in situations where the charter or bylaws of the employer restrict the ownership of substantially all outstanding employer securities to employees, to a qualified plan trust, or to an S corporation.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The employer must make this put option available for at least 60 days following distribution of the stock and, if it is not exercised within that time, it must be made available for another 60 day period (at a minimum) in the following year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The plan may repurchase the stock instead of the employer, but the plan cannot be required to do so. Certain banks that are prohibited by law from redeeming or purchasing their own shares are not subject to the requirement that they give participants a put option.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If, pursuant to a put option, an employer is required to repurchase securities distributed to an employee as part of a &ldquo;total distribution,&rdquo; the amount paid for the securities must be paid in substantially equal periodic payments (at least annually), over a period beginning within 30 days after the exercise of the put option, and not exceeding five years.&nbsp;The employer must provide adequate security and reasonable interest must be paid on any unpaid amounts. A total distribution is a distribution to the recipient within one taxable year of the balance to the credit in his or her account.<a href="#_ftn6" name="_ftnref6">⁶</a> If an employer is required to repurchase securities distributed to an employee as part of an &ldquo;installment distribution,&rdquo; the amount paid for the securities must be paid within 30 days after the put option is exercised.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;401(a)(23), 4975(e)(7).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;409(h).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;409(h)(2)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;409(h)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;409(h)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;409(h)(5).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;409(h)(6).<br /> <br /> </div></div><br />

<div class="Section1">A stock bonus plan is required to pass through certain voting rights to participants or beneficiaries. If an employer's securities are "registration-type," each participant or beneficiary generally must be entitled to direct the plan as to how securities allocated to him or her are to be voted.<a href="#_ftn1" name="_ftnref1">¹</a> "Registration-type" securities are securities that must be registered under Section 12 of the Securities and Exchange Act of 1934 or that would be required to be registered except for an exemption in that law.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> If securities are not "registration-type" and more than 10 percent of a plan's assets are invested in securities of the employer, each participant (or beneficiary) must be permitted to direct voting rights under securities allocated to his or her account with respect to approval of corporate mergers, consolidations, recapitalizations, reclassifications, liquidations, dissolutions, sales of substantially all of the business's assets, and similar transactions as provided in future regulations.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If the plan contains non-registration-type securities, the plan satisfies this requirement if each participant is given one vote with respect to an issue and the trustee votes the shares held by the plan in a proportion that takes this vote into account.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 401(a)(28), 4975(e)(7), 409(e)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 409(e)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 409(e)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 401(a)(22), 409(e)(3), 409(e)(5).<br /> <br /> </div>

<div class="Section1">The 2017 tax reform legislation increased the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service to $6,000 (from $3,000) for tax years beginning after December 31, 2017.<a href="#_ftn1" name="_ftnref1">¹</a> The $6,000 amount will be adjusted for inflation in $500 increments ($6,500 in 2022, $7,000 in 2023 and $7,500 in 2024).</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 457(e)(11)(B).<br /> <br /> </div>

<div class="Section1">Yes, an employer can provide employees with benefits through a stock bonus plan. Generally, a stock bonus plan is a profit sharing plan that holds employer securities and generally distributes those securities to participants when benefits are paid.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Stock bonus plans can be funded through an employer&rsquo;s contribution of employer securities, cash, or both.&nbsp;Traditionally, the IRS has taken the position that the distribution must be in the form of employer stock (except for the value of a fractional share).<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;The&nbsp;Tax Court has agreed with the IRS position.<a href="#_ftn3" name="_ftnref3">³</a> A stock bonus plan may provide for payment of benefits in cash if certain conditions are met (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8917">8917</a>). For the purpose of allocating contributions and distributing benefits, the plan is subject to the same requirements as a profit sharing plan.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401-1(a)(2)(iii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 71-256, 1971-1 CB 118.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em>Miller v. Comm.</em>, 76&nbsp;TC 433 (1981).<br /> <br /> </div></div><br />

<div class="Section1">Distributions from a stock bonus plan are subject to mandatory 20 percent withholding, unless the employee elects a direct rollover.<a href="#_ftn1" name="_ftnref1">¹</a> The mandatory withholding requirement does not apply to any distribution that consists only of securities of the employer-corporation and cash of up to $200 that is received in lieu of stock. The maximum amount to be withheld under the mandatory withholding rules may not exceed the sum of the amount of money received and the fair market value of property other than securities of the employer corporation received in the distribution.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> The plan must provide that if a participant, with the consent of his or her spouse, so elects, the distribution of the account balance will begin within one year after the plan year:<br /> <blockquote>(1)  in which the participant separates from service by reason of attainment of the normal retirement age under the plan, disability, or death; or<br /> <br /> (2)  which is the fifth plan year following the plan year in which the participant otherwise separated from service.</blockquote><br /> Distribution under (2) will not be required if the participant is re-employed by the employer before distributions actually begin under (2).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The plan also must provide that, unless the participant elects otherwise, distribution of the participant's account balance will be made in substantially equal periodic payments (at least annually) over a period not longer than the greater of (1) five years, or (2) in the case of a participant with an account balance in excess of $1,380,000 as indexed in 2024 ($1,330,000  for 2023, $1,230,000 for 2022 and $1,165,000 for 2021), five years plus one additional year (not to exceed five additional years) for each $275,000 (for 2024), or fraction thereof, by which the employee's account balance exceeds $1,380,000.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> An employer whose stock is not publicly traded, and therefore is subject to the employer's potential obligation to repurchase its stock from terminating plan participants, should be concerned about the impact that obligation could have on its cash flow. The employer should consider writing its plan to take the maximum time allowed, generally five years, to begin the process of distributing stock from the plan and then repurchasing that stock from former employees. <em>Martin Silfen, J.D., Brown Brothers Harriman Trust Co., LLC</em>.<br /> <br /> <hr /><br /> <br /> Notwithstanding these requirements, if the general rules for commencement of distributions from qualified plans require distributions to begin at an earlier date, those general rules control.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 3405(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 3405(e)(8).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 409(o)(1)(A).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 409(o)(1)(C); Notice 2022-55.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  <em><em>See</em></em> General Explanation of TRA '86, p. 840.<br /> <br /> </div>

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note</em>: The Affordable Care Act (&ldquo;ACA&rdquo;) imposes an annual limitation on contributions to a health FSA. For taxable years beginning after 2012, FSA contributions will not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the arrangement. The limit will be indexed for inflation ($3,300 in 2025 and $3,200 in 2024).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A health flexible spending arrangement (FSA) is a program that is established under IRC Section 125 to provide for the reimbursement of certain expenses that have already been incurred. This benefit may be provided as a stand-alone plan or as part of a traditional cafeteria plan.<br /> <br /> Health coverage under an FSA is not required to be provided under commercial insurance plans, but the coverage that is provided must demonstrate the risk shifting and risk distribution characteristics of insurance. Reimbursements under a health FSA must be paid specifically to reimburse medical expenses that have been incurred previously.<br /> <br /> A health FSA cannot provide coverage only for periods during which the participants expect to incur medical expenses if the period is shorter than a plan year. Further, the maximum reimbursement amount must always be available throughout the period of coverage (properly reduced for prior reimbursements for the same period of coverage).<br /> <br /> This must be true without regard to the extent to which the participant has paid the required premiums for the coverage period, and without a premium payment schedule based on the rate or amount of covered claims incurred in the coverage period.<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;Though there was no statutory limit on contributions to a health FSA prior to 2013, most employers imposed a limit to protect themselves against large claims that had not yet been funded by salary reductions.<br /> <br /> The period of coverage must be 12 months, or in the case of a short first plan year, the entire first year (or the short plan year where the plan year is changed). Elections to increase or decrease coverage may not be made during a coverage year, but prospective changes may be allowed consistent with certain changes in family status.<br /> <br /> The plan may permit the period of coverage to be terminated if the employee fails to pay premiums, provided that the terms of the plan prohibit the employee from making a new election during the remaining period of coverage.&nbsp;The plan may permit revocation of existing elections by an employee who terminated service.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> As is the case with a cafeteria plan, a health FSA may provide a grace period of no more than 2&frac12; months following the end of the plan year for participants to incur and submit expenses for reimbursement.&nbsp;The grace period must apply to all participants in the plan. Plans may adopt a grace period for the current plan year by amending the plan document before the end of the current plan year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> For tax years beginning in 2014 and beyond, a health FSA may be amended so that $500 ($660 for 2025 projected, $640 in 2024, $610 in 2023, $570 in 2022 and $550 in 2020 and 2021) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carry forward provision may not also offer the grace period.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The plan may not reimburse premiums paid for other health plan coverage, but it may reimburse medical expenses of the kind described under IRC Section&nbsp;213(d).<a href="#_ftn6" name="_ftnref6">⁶</a> Beginning in 2011, reimbursements for medicine are limited to doctor-prescribed drugs and insulin. Before 2020, over-the-counter medicines were not qualified expenses unless the participant obtained a doctor&rsquo;s prescription.<a href="#_ftn7" name="_ftnref7">⁷</a> However, beginning in 2020 the CARES Act now allows these over-the-counter medical expenses to be reimbursed by an FSA without a prescription.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The reimbursed medical expenses must be expenses incurred to obtain medical care during the period of coverage.&nbsp;The employee must provide substantiation that the expense claimed has been incurred and is not reimbursable under other health coverage.<a href="#_ftn9" name="_ftnref9">⁹</a>&nbsp;The IRS has approved the use of employer-issued debit and credit cards to pay for medical expenses as incurred, provided that the employer requires subsequent substantiation of the expenses or has in place sufficient procedures to substantiate the payments at the time of purchase.<a href="#_ftn10" name="_ftnref10">¹⁰</a> On a one-time basis, a plan may allow a qualified HSA distribution (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8834">8834</a>).<br /> <br /> An employee must include the value of employer-provided coverage for qualified long-term care services provided through an FSA in gross income. <a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <p style="text-align: center;"><strong>Substantiation Requirements</strong></p><br /> The IRS has released guidance<a href="#_ftn12" name="_ftnref12">¹²</a> on the types of substantiation that are acceptable for health FSAs offered via IRC Section 125 cafeteria plans. The IRS is clear that the plan must adopt procedures to ensure that all claims are substantiated.<br /> <br /> The IRS guidance approved a system where a plan will only reimburse Section 213(d) medical expenses that are substantiated by information from a third party that is independent of the employee and the employee&rsquo;s spouse and dependents (where the information from the third party describes the service or product, the date of service or sale, and the amount of the expense). The approved system also reimburses expenses based on information from independent third parties (such as an explanation of benefits from an insurance company) and requires that information from the independent third party include (i) the date of the medical care and (ii)&nbsp;the employee&rsquo;s share of the cost of the medical care (i.e., coinsurance payments and amounts below the deductible). Employee must also certify that any expense paid by the plan has not been reimbursed by insurance or otherwise and that the employee will not seek reimbursement from any other plan covering health benefits.<br /> <br /> Under the guidance, self-certification of claims that are not otherwise substantiated does not ensure that all claims are substantiated, meaning that cafeteria plans are prohibited from adopting a self-certification regime. Similarly, plans that (1) adopt a &ldquo;sampling&rdquo; technique, (2)&nbsp;only require substantiation of claims below a certain dollar threshold or (3) do not require substantiation of claims paid via a debit card to certain preferred dentists, doctors, hospitals, or other health care providers fail to ensure that all claims are substantiated.<br /> <br /> For cafeteria plans that adopt prohibited substantiation rules, all amounts paid under their health FSAs will be included in gross income.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;125(i), as added by PPACA 2010; Notice 2012-40, 2012-1 CB 1046.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(e).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(e); Notice 2005-42, 2005-1 CB 1204; Notice 2012-40, 2012-1 CB 1046.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Notice 2013-71, 2013-47 IRB 532.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(k).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;106(f).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; CARES Act &sect;&nbsp;3702.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-6(b); Rev. Proc. 2003-43, 2003-1 CB 935; superseded and modified by Notice 2013-30, 2013-21 IRB 1099. See <em>Grande v. Allison Engine Co.</em>, 2000 U.S Dist. LEXIS 12220 (S.D. Ind. 2000).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Notice 2006-69, 2006-2 CB 107. See also Notice 2007-2, 2007-1 CB 254.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect;&nbsp;106(c)(1).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC OCC Memo 202317020.<br /> <br /> </div></div><br />

<div class="Section1">A surviving spouse who receives death benefits payable under a contract, or pursuant to an established plan of the employer, must include such amounts in income.<a href="#_ftn1" name="_ftnref1">¹</a> However, if the employee death benefits are payable because of the death of certain terrorist attack victims or astronauts, they may be excluded from gross income.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> Frequently, death benefits are funded by insurance on the life of the employee, with the insurance owned by and payable to the employer. These death benefits do not become tax-exempt to the employee's surviving spouse simply because the proceeds of the insurance policy are received tax-free by the employer. While the employer receives the proceeds as life insurance proceeds, the surviving spouse receives them as compensation payments from the employer.<a href="#_ftn3" name="_ftnref3">³</a> As a result, employee death benefits rarely qualify as life insurance benefits wholly excludable under IRC Section 101(a).<a href="#_ftn4" name="_ftnref4">⁴</a> Death benefits payable to an employee's surviving spouse under a split-dollar arrangement, however, may be received free of income tax obligations.<br /> <br /> Contractual death benefits are treated as "income in respect of a decedent."<a href="#_ftn5" name="_ftnref5">⁵</a> As a result, where an estate tax has been paid, the recipient of the death payments is entitled to an income tax deduction for that portion of the estate tax attributable to the value of the payments.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Simpson v. U.S.</em>, 261 F.2d 497 (7th Cir. 1958); <em>Robinson v. Comm.</em>, 42 TC 403 (1964).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 101(i).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  <em>Essenfeld v. Comm.</em>, 311 F.2d 208 (2d Cir. 1962).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  See <em>Edgar v. Comm.</em>, TC Memo 1979-524.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  <em>Est. of Wright v. Comm.</em>, 336 F.2d 121 (2d Cir. 1964).<br /> <br /> </div>