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Retirement Plan Payments for Accident, Health and Disability Insurance

Final regulations (T.D. 9665) state that payments from a qualified defined contribution plan to pay a participant’s:

  • accident and health insurance premiums are taxable distributions to the participant unless a statutory exception applies (Internal Revenue Code Sections 72 and 402(a)), and
  • disability insurance premiums aren’t taxable distributions if they meet certain conditions.

The regulations finalize the 2007 proposed regulations and add the exception for disability insurance coverage; they are effective January 1, 2015, but may be applied earlier.

Accident and health insurance

The 2007 proposed regulations stated the general rule that payments from a qualified plan to pay a participant’s accident or health insurance premiums are taxable distributions unless they’re paid:

  • from a qualified retiree health account (IRC Section 401(h)), or
  • for qualified public safety officers (IRC Section 402(l)).

Disability insurance

The final regulations include an exception for disability insurance premiums being taxed to participants if the following conditions are met:

  1. Premiums for the disability insurance contract are paid directly from the plan.
  2. The plan receives the benefit payments as required by the disability insurance contract.
  3. Benefit payments under the contract are paid because of an employee’s inability to continue employment with the employer because of disability.
  4. The benefit payments to a participant’s account aren’t more than a reasonable expectation of what the participant would’ve received as an annual contribution during the disability period, reduced by any other contributions.

If these conditions are satisfied, the disability insurance is considered a plan investment, and the plan’s premium payments and the insurance’s benefit payments to the plan aren’t taxable to the participant.

If the disability insurance premiums aren’t paid by the plan, the insurance benefits paid to the plan aren’t a return on a plan investment. Instead, these payments are contributions to the plan governed by qualified plan contribution rules (generally, IRC Section 415(c), which limits employer contributions to a defined contribution plan).

If an employer self-insures this disability coverage (or doesn’t finance it through third party insurance), the amount paid to the plan because of the employee’s disability is also considered a contribution to the plan governed by the general qualified plan contribution rules.

The final regulations add the exception for nontaxability of disability insurance based on comments we received on the 2007 proposed regulations, which:

  • recommended that disability insurance designed to protect against the loss of plan contributions during a period of disability should be excluded from the general taxable distribution rule, and
  • noted that the participant would be taxed on these insurance benefits when they are distributed from the plan.

Additional resources

 

Page Last Reviewed or Updated: 12-May-2014