Cypen & Cypen
JANUARY 24, 2007
Stephen H. Cypen, Esq., Editor
LAW FIRM QUESTIONS IRS GUIDANCE ON PPA:
Our readers are aware that Internal Revenue Service has issued Notice 2007-7 to provide guidance in the form of Questions and Answers with respect to certain provisions of the Pension Protection Act of 2006 (see C&C Special Supplement for January 11, 2007).
One portion of the Guidance issued was on interpretation of Section 845 of PPA. That section provides a $3,000 income tax exclusion for eligible retired public safety officers who elect to use a portion of their distribution from an eligible retirement plan directly to pay for qualified health insurance premiums.
Specifically, Q&A-23, as written, defines the term “accident or health insurance plan” in a very restrictive manner. One unfortunate result of such interpretation may be to deny this important tax benefit to a significant number of retired public safety officers otherwise entitled to receive it.
Now, IceMiller, a national law firm that provides counsel to a wide variety of public sector plans, has written to IRS, expressing its concerns of Q&A-23. IceMiller has requested that IRS issue a revised Q&A-23, providing that qualified health insurance plans may include premiums for coverage under any type of accident or health plan, as defined under Treasury Regulations, regardless of whether the plan is insured or self-insured.
The letter, which is dated January 18, 2007, is important enough to duplicate below.
We assume that if and when IRS responds, we will hear about it, and will advise our readers.
January 18, 2007
RE: IRS Notice 2007-7, Q&A—23
We are writing to you in regard to IRS
Notice 2007-7, the recently issued guidance on the Pension
Protection Act of 2006 ("PPA"), and as a follow-up
to a telephone conference we had with Mr. Reeder this week.
While we welcome the helpful explanations on many aspects
of the PPA, we have significant concerns regarding one portion
of the guidance issued on the interpretation of Section
845 of the PPA. As you know, that Section provides a $3,000
income tax exclusion for eligible retired public safety
officers who elect to use a portion of their distribution
from an eligible retirement plan to directly pay for qualified
health insurance premiums.
BACKGROUND AND PPA § 845
Public safety unions have been engaged in a multi-year effort to provide their retired members with the opportunity to continue pre-tax deductions for health care premiums, which they had as active members. Those efforts came to fruition with the passage of the HELPS program in Section 845 of the PPA (adding Code Section 402(l)). This section provides in pertinent part as follows:
IRS Notice 2007-7 included a series of Q&As regarding implementation of new Code Section 402(l). Our particular concern relates to Q&A-23, which provides as follows:
1. Legislative History
The legislative history to Section 845 of the PPA does not provide any indication that Congress intended to provide this exclusion only to retirees covered by health plans or policies offered by insurance companies, as opposed to also including retirees with health coverage under any accident or health insurance plan, including a self-insured plan offered by an employer:
The bill provides that certain pension distributions from an eligible retirement plan used to pay for qualified health insurance premiums are excludible from income, up to a maximum exclusion of $3,000 annually….
Qualified health insurance premiums include
premiums for accident or health insurance or qualified long-term
care insurance contracts covering the taxpayer, the taxpayer's
spouse, and the taxpayer's dependents. The qualified health
insurance premiums do not have to be for a plan sponsored
by the employer; however, the exclusion does not apply to
premiums paid by the employee and reimbursed with pension
distributions. Amounts excluded from income under the provision
are not taken into account in determining the itemized deduction
for medical expenses under section 213 or the deduction
for health insurance of self-employed individuals under
2. Internal Revenue Code and Regulation Provisions
Code Section 402(l) (PPA Section 845)
uses the phrase "accident or health insurance"
plan without a cross-reference to any definition of that
term. We believe the most appropriate place to seek a complete
definition is Internal Revenue Code Sections 104 and 105.
Those sections govern the treatment of certain amounts received
through "accident or health insurance" for personal
injuries or sickness. Code Section 104 governs the tax treatment
of benefits paid through accident or health insurance for
injuries or sickness other than employer provided coverage,
and Code Section 105 governs the tax treatment of benefits
paid through accident or health insurance for injuries or
sickness through accident or health insurance provided by
the employer. Thus, since we believe the intent of PPA Section
845 was to cover both employer-based coverage, as well as
individual-based coverage (as indicated in the JCT Explanation),
it is appropriate to review the terms used in both sections.
Both sections and their related regulations lead to the
conclusion that both insurance and self-insurance are included
within the term "accident or health insurance."
We have emphasized Section 105 because the clients that
we represent are primarily concerned with employer-provided
accident and health insurance. However, we have also included
Section 104 because PPA Section 845 covers individually
secured products and because we believe Section 105 and
Section 104 present a clear, consistent picture.
3. Code Section 104 and Regulation
Section 104(a)(3) provides an exclusion
from gross income for:
Treasury Regulation § 1.104-1(d) provides as follows:
(d) ACCIDENT OR HEALTH INSURANCE. Section
104(a)(3) excludes from gross income amounts received through
accident or health insurance for personal injuries or sickness
(other than amounts received by an employee, to the extent
that such amounts (1) are attributable to contributions
of the employer which were not includible in the gross income
of the employee, or (2) are paid by the employer). Similar
treatment is also accorded to amounts received under accident
or health plans and amounts received from sickness or disability
funds. See section 105(e) and § 1.105-5. If, therefore,
an individual purchases a policy of accident or health insurance
out of his own funds, amounts received thereunder for personal
injuries or sickness are excludable from his gross income
under section 104(a)(3). See, however, section 213 and the
regulations thereunder as to the inclusion in gross income
of amounts attributable to deductions allowed under section
213 for any prior taxable year. Section 104(a)(3) also applies
to amounts received by an employee for personal injuries
or sickness from a fund which is maintained exclusively
be employee contributions. Conversely, if an employer is
either the sole contributor so such a fund, or is the sole
purchaser of a policy of accident or health insurance for
his employees (on either a group or individual basis), the
exclusion provided under section 104(a)(3) does not apply
to any amounts received by his employees through such fund
or insurance. If the employer and his employees contribute
to a fund or purchase insurance which pays accident or health
benefits to employees, section 104(a)(3) does not apply
to amounts received thereunder by employees to the extent
that such amounts are attributable to the employer's contributions.
See § 1.105-1 for rules relating to the determination
of the amount attributable to employer contributions. Although
amounts paid by or on behalf of an employer to an employee
for personal injuries or sickness are not excludable from
the employee's gross income under section 104(a)(3), they
may be excludable therefrom under section 105. See §§
1.105-1 through 1.105-5, inclusive. For treatment of accident
or health benefits paid to or on behalf of a self-employed
individual by a trust described in section 401(a) which
is exempt under section 501(a) or under a plan described
in section 403(a), see paragraph (g) of § 1.72-15.
[Added April 13, 1964, by T.D. 6722.]
4. Code Section 105 and Regulation
(e) ACCIDENT AND HEALTH PLANS. For purposes
of this section and section 104 —
Treasury Regulation § 105-5(a) provides as follows:
(a) IN GENERAL. Sections 104(a)(3) and 105(b), (c), and (d) exclude from gross income certain amounts received through accident or health insurance. Section 105(e) provides that for purposes of sections 104 and 105 amounts received through an accident or health plan for employees, and amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia, shall be treated as amounts received through accident or health insurance. In general, an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. A plan may cover one or more employees, and there may be different plans for different employees or classes of employees. An accident or health plan may be either insured or noninsured, and it is not necessary that the plan be in writing or that the employee's rights to benefits under the plan be enforceable. However, if the employee's rights are not enforceable, an amount will be deemed to be received under a plan only if, on the date the employee became sick or injured, the employee was covered by a plan (or a program, policy, or custom having the effect of a plan) providing for the payment of amounts to the employee in the event of personal injuries or sickness, and notice or knowledge of such plan was reasonably available to the employee. It is immaterial who makes payment of the benefits provided by the plan. For example, payment may be made by the employer, a welfare fund, a State sickness or disability benefits fund, an association of employers or employees, or by an insurance company.
We respectfully request that the Service
issue a revised Q&A-23, providing that qualified health
insurance premiums may include premiums for coverage under
any type of accident or health plan, as defined under Treas.
Reg. § 1.104-1(d) or Treas. Reg. § 1.105-5(a),
regardless of whether the plan is insured or self-insured.
Specifically we believe the answer to Question 23 would
be: "The accident or health insurance plan must meet
the requirements of Treasury Regulation Section 1.104-1(d)
or 1.105-5(a)." This interpretation would be well understood,
would be consistent with existing regulations on the treatment
of accident and health plans, and would best effectuate
Congressional intent to provide this benefit to all eligible
retired public safety officers.
Thank you for considering these comments. We would welcome the opportunity to discuss with you any of the issues addressed in this letter. We can be reached at the telephone numbers and e-mail addresses listed on the first page of this letter.
Very truly yours,
Lisa Erb Harrison
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