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. We will keep you informed if further guidance is
issued.
Originally published on the Employer's Law Blog
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