[Federal Register: August 20, 2007 (Volume 72, Number 160)]
[Proposed Rules]
[Page 46421-46426]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20au07-14]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-148393-06]
RIN 1545-BG12
Medical and Accident Insurance Benefits Under Qualified Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations under section
402(a) of the Internal Revenue Code (Code) regarding the tax treatment
of payments by qualified plans for medical or accident insurance. These
regulations would affect administrators of, participants in, and
beneficiaries of qualified retirement plans. This document also
provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by November 19,
2007. Outlines of topics to be discussed at the public hearing
scheduled for December 6, 2007, at 10 a.m., must be received by
November 15, 2007.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-148393-06), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
148393-06), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or send electronically via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-148393-06).
The public hearing will be held in
[[Page 46422]]
the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Pamela R. Kinard (202) 622-6060; concerning submissions of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Kelly Banks, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
section 402(a) of the Code, as well as conforming amendments under
sections 72, 105, 106, 401, 402(c), 403(a), and 403(b).
Section 104(a)(3) provides, in general, that gross income does not
include amounts received through accident or health insurance (or
through an arrangement having the effect of accident or health
insurance) for personal injuries or sickness. This exclusion does not
apply to amounts attributable to (and not in excess of) deductions
allowed under section 213 for any prior taxable year, or to other
amounts received by an employee to the extent such amounts either are
attributable to contributions by the employer that were not includible
in the gross income of the employee or are paid by the employer.
Section 105(a) provides that, except as otherwise provided, amounts
received by an employee through accident or health insurance for
personal injuries or sickness are included in gross income to the
extent such amounts (1) are attributable to contributions by the
employer which were not includible in the gross income of the employee
or (2) are paid by the employer.
Section 105(b) generally provides that, except in the case of
amounts attributable to deductions allowed under section 213 for any
prior taxable year, gross income does not include amounts referred to
in section 105(a) if such amounts are paid, directly or indirectly, to
the taxpayer to reimburse the taxpayer for expenses incurred by the
taxpayer for the medical care of the taxpayer and his or her spouse or
dependents.
Section 106 provides that the gross income of an employee does not
include employer-provided coverage under an accident or health plan.
Section 1.106-1 provides that the gross income of an employee does not
include contributions that the employer makes to an accident or health
plan for compensation (through insurance or a separate trust or fund)
for personal injuries or sickness to the employee or the employee's
spouse or dependents.
Section 7702B(a)(1) provides that, for purposes of the Code, a
qualified long-term care insurance contract is treated as an accident
and health insurance contract.
Section 213 generally allows a deduction for expenses paid during
the taxable year, not compensated for by insurance or otherwise, for
medical care of the taxpayer, his or her spouse, and dependents, to the
extent that the expenses exceed 7.5 percent of the taxpayer's adjusted
gross income. Section 213(d)(1) provides that the term ``medical care''
includes amounts paid for insurance covering medical care (including
eligible long-term care premiums with respect to qualified long-term
care insurance contracts).
Section 401(a) sets forth requirements for a trust forming part of
a pension, profit-sharing, or stock bonus plan to be qualified under
section 401(a).
Section 401(h) provides that a pension or annuity plan may provide
for the payment of benefits for sickness, accident, hospitalization,
and medical expenses of retired employees, their spouses and their
dependents only if certain enumerated conditions are met. Those
conditions include: (1) The aggregate actual contributions for medical
benefits (when added to actual contributions for life insurance
protection under the plan) may not exceed 25 percent of the total
actual contributions to the plan (other than contributions to fund past
service credits) after the date on which the account is established;
(2) a separate account must be established and maintained for such
benefits; (3) the employer's contributions to the separate account must
be reasonable and ascertainable; (4) it must be impossible, at any time
prior to the satisfaction of all liabilities under the plan to provide
such benefits, for any part of the corpus or income of such separate
account to be (within the taxable year or thereafter) used for, or
diverted to, any purpose other than the providing of such benefits; (5)
any amount remaining after satisfaction of all liabilities must, under
the terms of the plan, be returned to the employer; and (6) special
limitations for the accounts of key employees must be satisfied.
Section 402(a) provides, in general, that any amount actually
distributed by a qualified plan is taxable under section 72 in the
taxable year in which distributed.
Section 72(a) provides that, except as otherwise provided, gross
income includes any amount received as an annuity (whether for a period
certain or during one or more lives) under an annuity, endowment, or
life insurance contract. Sections 72(d) and (e) provide rules for
determining the portion of any distribution that is not includable in
gross income as a recovery of a participant's investment in the
contract (generally the amount of the unrecovered after-tax employee
contributions) under a qualified employer retirement plan.
Section 402(l), added by section 845(a) of the Pension Protection
Act of 2006, Public Law 109-280 (120 Stat. 780) (PPA '06), provides a
limited exclusion from gross income for distributions from an eligible
retirement plan used to pay health or long-term care insurance premiums
of an eligible retired public safety officer to the extent that the
aggregate amount of the distributions for the taxable year is not in
excess of the qualified health insurance premiums of the retired public
safety officer and his or her spouse or dependents. The total amount
excluded from gross income pursuant to section 402(l) shall not exceed
$3,000.
Section 1.72-15 provides rules relating to the tax treatment of
amounts paid from an employer-established plan to which section 72
applies and which provides for distributions of accident or health
benefits. With respect to benefits that are attributable to employer
contributions, Sec. 1.72-15(d) provides that any amount received as an
accident or health benefit is includible in gross income, except to the
extent excludable from gross income under section 105(b) (relating to
reimbursements of medical care expenses as defined in section
213(d)).\1\ Section 1.72-15(e) provides that the taxability of benefits
that are not accident or health benefits is determined under section 72
without regard to any exclusion under section 104 or 105.
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\1\ Section 1.72-15(d) also refers to benefits excludible under
section 105(c) (relating to certain payments unrelated to absence
from work) or 105(d), which was repealed in 1983 (and which related
to certain disability payments).
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Section 1.401-1(b)(1)(i) provides that a plan is not a pension plan
within the meaning of section 401(a) if it provides for the payment of
benefits not customarily included in a pension plan such as layoff
benefits or benefits for sickness, accident, hospitalization, or
medical expenses (except for medical benefits described in section
401(h)). See Sec. 1.401(a)-1(b)(1)(ii).
Section 1.401-1(b)(1)(ii) provides that a profit-sharing plan
within the meaning of section 401(a) is primarily a plan of deferred
compensation, but that amounts allocated to the account of a
[[Page 46423]]
participant may be used to provide incidental life or accident or
health insurance for the participant and the participant's family.
Section 1.401-1(b)(1)(iii) provides that a stock bonus plan is a plan
established and maintained by the employer to provide benefits similar
to those of a profit-sharing plan.
Rev. Rul. 61-164 (1961-2 CB 99), see Sec. 601.601(d)(2) of this
chapter, holds that a profit-sharing plan does not violate the
incidental benefit rule in Sec. 1.401-1(b)(1)(ii) merely because, in
accordance with the terms of the plan, each participant's account under
the plan is charged with the cost of health insurance for the
participant under group hospitalization insurance for the employer's
employees, provided that the total amount used for life or accident or
health insurance for the employee and the employee's family is
incidental. The ruling concludes that such insurance is treated as
incidental if the amount expended does not exceed 25 percent of the
funds allocated to a participant's account that have not been
accumulated for the period prescribed by the plan for the deferment of
distributions. The ruling also concludes that the use of profit-sharing
plan funds to pay for medical insurance for a participant and his or
her beneficiary is a distribution within the meaning of section 402.
Rev. Rul. 73-501 (1973-2 CB 127), see Sec. 601.601(d)(2) of this
chapter, applies the incidental benefit rule to the purchase of life
insurance by a profit-sharing plan. The ruling states that ``[u]nder a
qualified profit-sharing plan, the use of trust funds to pay the cost
of life, accident, or health insurance for an employee is a
distribution within the purview of section 402 of the Code.''
Rev. Rul. 2003-62 (2003-1 CB 1034), see Sec. 601.601(d)(2) of this
chapter, concludes that amounts distributed from a qualified retirement
plan that the distributee elects to have applied to pay health
insurance premiums under a cafeteria plan are includible in the
distributee's gross income. The ruling also holds that the same
conclusion applies where amounts distributed from the plan are applied
directly to reimburse medical care expenses incurred by a participant.
Rev. Rul. 2005-55 (2005-2 CB 284), see Sec. 601.601(d)(2) of this
chapter, holds that a profit-sharing plan that provides a sub-account
which permits distributions only for the purpose of reimbursing the
participant for substantiated medical expenses imposes conditions on
the entitlement of the participant to amounts held in the sub-account
and, as a result of the conditions, does not meet the nonforfeitability
requirements of section 411.
Explanation of Provisions
The proposed regulations would clarify that a payment from a
qualified plan for an accident or health insurance premium generally
constitutes a distribution under section 402(a) that is taxable to the
distributee under section 72 in the taxable year in which the premium
is paid. The taxable amount generally equals the amount of the premium
charged against the participant's benefits under the plan. If a defined
contribution plan pays these premiums from a current year contribution
or forfeiture that has not been allocated to a participant's account,
then the amount of the premium for each participant will be treated as
first being allocated to the participant and then charged against the
participant's benefits under the plan, so that the amount of the
distribution is the same as determined under the preceding sentence.
These regulations would also provide that a distribution for the
payment of the premiums by a qualified plan generally is not excluded
from gross income under section 104, 105, or 106, but such distribution
would constitute an amount paid for accident or health insurance under
section 213. Furthermore, to the extent that the payment of premiums
for accident or health insurance has been treated as a distribution
from a qualified plan, amounts received through the accident or health
insurance for personal injuries or sickness are excludable from gross
income under section 104(a)(3) and are not treated as distributions
from the plan.
A related issue is whether the purchase of accident and health
insurance can be treated as if the trust merely purchased an investment
under which an insurer's payments for medical expenses are made to the
trust and then treated as a return on that investment. The proposed
regulations would clarify that payments from accident or health
insurance for medical expenses that are made to the trust (rather than
made to the medical service provider or the participant as
reimbursement for covered expenses) are treated as having been made to
the participant and then contributed by the participant to the plan.
Comments are requested on whether there should be limited exceptions to
this general rule (such as an exception for a provision that has the
effect of a waiver of premium in the case of disability).
The proposed regulations would not alter the incidental benefit
rule of Sec. 1.401-1(b)(1)(ii) (which provides that a profit-sharing
plan may provide incidental life or accident or health insurance for
the participant and the participant's family) nor would they alter the
tax treatment of the payment of life insurance. For the tax treatment
of payments for life insurance, see section 72(m)(3) and Sec. 1.72-16.
The general rule that accident and health insurance premiums are
taxable distributions would not apply to amounts held under a medical
account that satisfies all the requirements of section 401(h). Accident
or health insurance purchased through a section 401(h) account does not
constitute a taxable distribution. See Sec. 1.72-15(h), providing that
employer contributions to provide medical benefits in section 401(h)
under a qualified plan or annuity are not includible in the gross
income of the employee on whose behalf contributions were made.\2\ The
result is the same if the section 401(h) account is funded with a
transfer from a qualified pension plan in accordance with section 420.
Similarly, section 402(l), as added by PPA '06, permits an exclusion
from gross income, up to $3,000 annually, for distributions paid
directly to an insurer to purchase accident or health insurance or
qualified long-term care insurance for an eligible retired public
safety officer and his or her spouse or dependents. The existence of
narrow exceptions for retiree medical benefits under section 401(h) and
for distributions for the payment of premiums on behalf of eligible
retired public safety officers under section 402(l) is consistent with
a general rule for inclusion in gross income of the payments of
premiums for accident and health insurance.
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\2\ See also H.R. Rep. No. 2317, 87th Cong., 2nd Sess. at 4
(1962), stating that no part of the contributions paid by the
employer to a section 401(h) account will be taxed currently to the
employee.
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Section 402(a) provides that amounts actually distributed from a
qualified plan are generally taxable to the distributee in the year of
the distribution. There is no general exception in section 402 for a
distribution in the form of accident or health insurance.\3\ Moreover,
Congress
[[Page 46424]]
has carefully prescribed and strictly limited the ability to pre-fund
accident and health insurance benefits on a tax-favored basis. The
rules specifically prescribed by Congress relating to the pre-funding
of future health benefits on a tax-favored basis include the rules in
section 223 (providing contribution limits and distribution rules for
health savings accounts (HSAs)); sections 419 and 419A (limiting
employer deductions for contributions to welfare benefit funds);
section 501(c)(9) (providing requirements for tax-exempt Voluntary
Employee Beneficiary Associations (VEBAs)); section 512 (providing for
the taxation of a VEBA's unrelated business income); and by sections
401(h) and 420 (governing retiree health benefits provided through a
separate health benefits account that is part of a pension or annuity
plan). Therefore, because Congress specifically prescribed these
limited provisions for favorable tax-treatment, a broad exclusion
permitting tax-favored treatment of any distribution used to pay
accident or health insurance premiums would be inconsistent with this
intentional statutory scheme.
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\3\ See, for example, the Joint Committee on Taxation's
Technical Explanation, Technical Explanation of H.R. 4, the
``Pension Protection Act of 2006'' as passed by the House on July
28, 2006, and Considered by the Senate on August 3, 2006 (JCX-38-
06), August 3, 2006, 109th Cong., 2nd Sess. 244 (2006), relating to
the exception under section 402(l), which states that, under present
law, distributions from a qualified plan are generally included in
gross income (subject to exceptions for investment in the contract
and qualified distributions from a designated Roth account).
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In addition, the existence of the incidental benefit rule in Sec.
1.401-1(b)(1)(ii) is not an indication that distributions used to
provide incidental life or accident or health insurance benefits are
eligible for tax-favorable treatment because the incidental benefit
rule relates solely to the qualification of a profit-sharing plan, not
to the tax treatment of amounts used to provide medical or accident
insurance benefits under such plan.
The proposed regulations also contain conforming amendments to the
Income Tax Regulations under sections 72, 105, 106, 401, and 402(c).
These conforming amendments would remove obsolete provisions, as well
as cite to the rules in these proposed regulations for determining the
tax treatment of the payment of premiums for accident and health
insurance from a qualified plan. Conforming amendments under sections
403(a) and 403(b) would also add a cross-reference to the regulations
under section 403(a) and section 403(b) that would apply the rules in
these proposed regulations to those arrangements. In addition, the
proposed regulations would revise the first sentence of Sec. 1.106-1
in order to update the definition of dependent in light of section 207
of the Working Families Tax Relief Act of 2004, Public Lic 108-311 (118
Stat. 1166) and Notice 2004-79 (2004-2 CB 898), see Sec.
601.601(d)(2). The proposed regulations would also amend Sec.
1.402(c)-2, Q&A-4 to add distributions of premiums for accident or
health insurance under Sec. 1.402(a)-1(e)(1) to the list of items that
are not eligible rollover contributions. Finally, these proposed
regulations would also include a cross-reference to section 402(l), as
added by PPA '06. For additional guidance on section 402(l), see Notice
2007-7 (2007-5 IRB 395), see Sec. 601.601(d)(2).
Proposed Effective Date
It is expected that the regulations will apply for calendar years
after the publication of final regulations in the Federal Register.
However, no inference should be drawn that the payment of premiums from
a qualified plan does not constitute a taxable distribution if made
prior to the effective date of these regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this proposed
regulation has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury Department and the IRS request comments on the
clarity of the proposed rules and how they may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for December 6, 2007, beginning
at 10 a.m. in the Auditorium, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by November 19, 2007 and an outline of the topics
to be discussed and the amount of time to be devoted to each topic (a
signed original and eight (8) copies) by November 15, 2007. A period of
10 minutes will be allotted to each person for making comments. An
agenda showing the scheduling of the speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Pamela R. Kinard and
Michael P. Brewer, Office of Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the
IRS and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 2. Section 1.72-15 is amended by:
1. Revising paragraphs (d), (h), and (i).
2. Removing and reserving paragraph (f).
The revisions read as follows:
Sec. 1.72-15 Applicability of section 72 to accident or health plans.
* * * * *
(d) Accident or health benefits attributable to employer
contributions. Any amounts received as accident or health benefits and
not attributable to contributions of the employee are includible in
gross income except to the extent that such amounts are excludable from
gross income under section 105(b) or (c) and the regulations
thereunder.
[[Page 46425]]
See Sec. 1.402(a)-1(e) for rules relating to the use of a qualified
plan under section 401(a) to pay premiums for accident or health
insurance.
* * * * *
(h) Medical benefits for retired employees, etc. See Sec.
1.402(a)-1(e)(2) for rules relating to the payment of medical benefits
described in section 401(h) under a qualified pension or annuity plan.
(i) Special rules--(1) In general. For purposes of section 72(b)
and (d), and this section, the taxpayer shall maintain such records as
are necessary to substantiate the amount treated as an investment in
the taxpayer's annuity contract.
(2) Delegation to Commissioner. The Commissioner may prescribe a
form and instructions with respect to the taxpayer's past and current
treatment of amounts received under section 72 or 105, and the
taxpayer's computation, or recomputation, of the taxpayer's investment
in his or her annuity contract. This form may be required to be filed
with the taxpayer's returns for years in which such amounts are
excluded under section 72 or 105.
Sec. 1.105-4 [Removed]
Par. 3. Section 1.105-4 is removed.
Sec. 1.105-6 [Removed]
Par. 4. Section 1.105-6 is removed.
Par. 5. Section 1.106-1 is amended by revising the first sentence
and adding a new sentence at the end of the paragraph to read as
follows:
Sec. 1.106-1 Contributions by employer to accident and health plans.
The gross income of an employee does not include the contributions
which the employer makes to an accident or health plan for compensation
(through insurance or otherwise) to the employee for personal injuries
or sickness incurred by the employee, the employee's spouse, or the
employee's dependents (as defined in section 152 determined without
regard to section 152(b)(1), (b)(2), or (d)(1)(B)).
* * *
For the treatment of the payment of premiums for accident or health
insurance from a qualified trust under section 401(a), see Sec. Sec.
1.72-15 and 1.402(a)-1(e).
Par. 6. Section 1.401-1 is amended by adding a new sentence at the
end of paragraph (b)(1)(ii) to read as follows:
Sec. 1.401-1 Qualified pension, profit-sharing, and stock bonus
plans.
* * * * *
(b) * * * (1)(i) * * *
(ii) * * * See Sec. Sec. 1.72-15, 1.72-16, and 1.402(a)-1(e) for
rules regarding the tax treatment of incidental life or accident or
health insurance.
* * * * *
Par. 7. Section 1.402(a)-1 is amended by removing the last two
sentences of paragraph (a)(1)(ii) and adding a new sentence in their
place and by adding a new paragraph (e) to read as follows:
Sec. 1.402(a)-1 Taxability of beneficiary under a trust which meets
the requirements of section 401(a).
(a) * * *
(1) * * *
(i) * * *
(ii) * * * Paragraph (e) of this section provides rules relating to
use of a qualified pension, annuity, profit sharing, or stock bonus
plan to provide accident or health benefits or coverage otherwise
described in section 104, 105, or 106.
* * * * *
(e) Medical, accident, etc. benefits paid from a qualified pension,
annuity, profit sharing, or stock bonus plan--(1) Payment of premiums--
(i) General rule. The payment of premiums from a qualified trust for
accident or health insurance, including a qualified long-term care
insurance contract under section 7702B, constitutes a distribution
under section 402(a) to the participant against whose benefit the
premium is charged. The amount of the distribution equals the amount of
the premium charged against the participant's benefits under the plan.
If a defined contribution plan pays these premiums from a current year
contribution or forfeiture that has not been allocated to a
participant's account, then the amount of the premium for each
participant will be treated as first being allocated to the participant
and then charged against the participant's benefits under the plan, so
that the amount of the distribution is treated in the same manner as
determined under the preceding sentence. Except as described in
paragraphs (e)(2) and (3) of this section, a distribution described in
this paragraph (e)(1) is not excludable from gross income.
(ii) Treatment of amounts received through accident or health
insurance. To the extent that the premium for accident or health
insurance constitutes a distribution under this paragraph (e)(1),
amounts received through accident or health insurance are neither
attributable to contributions by the employer which are not includible
in the gross income of the employee nor are such amounts paid by the
employer. Accordingly, amounts received through the accident or health
insurance for personal injuries or sickness are excludable from gross
income under section 104(a)(3) and are not treated as distributions
from the plan. If amounts received through accident or health insurance
are paid to the plan instead of the employee, these amounts are treated
as having been paid to the employee and then contributed by the
employee to the plan (and these amounts must satisfy the qualification
requirements applicable to employee contributions).
(2) Medical benefits for retired employees provided under an
account described in section 401(h). The payment of medical benefits
described in section 401(h) under a pension or annuity plan is treated
in the same manner as a payment of accident or health benefits
attributable to employer contributions, or employer-provided coverage
under an accident or health plan. See Sec. 1.401-14(a) for the
definition of medical benefits described in section 401(h).
Accordingly, amounts applied for the payment of accident or health
benefits, or for the payment of accident or health coverage, from a
section 401(h) account are not includible in the gross income of the
participant on whose behalf such contributions are made to the extent
they are excludible from gross income under section 104, 105, or 106.
(3) Distributions to eligible retired public safety officers. See
section 402(l) for a limited exclusion from gross income for
distributions used to pay for certain accident or health premiums
(including premiums for qualified long-term care insurance contracts).
This limited exclusion applies to eligible retired public safety
officers, as defined in section 402(l)(4)(B).
(4) Effect of making a distribution of insurance premiums on
qualification. See Sec. 1.401-1(b)(1) for rules concerning the types
and amount of medical coverage and benefits that are permitted to be
provided under a plan that is part of a trust described in section
401(a). For example, Sec. 1.401-1(b)(1)(ii) provides that a profit-
sharing plan is primarily a plan of deferred compensation, but the
amounts allocated to the account of a participant may be used to
provide incidental accident or health insurance for the participant and
the participant's family. See also, section 401(k)(2)(B) for certain
restrictions on the distribution of elective contributions.
(5) Application of this paragraph (e). This paragraph (e) applies
to the payment of premiums charged against the benefits of a
beneficiary or an alternate payee in the same manner as the payment of
premiums charged against the account of a participant.
(6) Example. The provisions of this paragraph (e) are illustrated
by the following example:
[[Page 46426]]
Example. (i) Facts. Employer sponsors a profit-sharing plan
qualified under section 401(a). The plan provides solely for non-
elective employer profit-sharing contributions. The plan's trustee
enters into a contract with a third-party insurance carrier to
provide health insurance for certain plan participants. The
insurance policy provides for the payment of medical expenses
incurred by those participants. The plan limits the amounts used to
provide medical benefits with respect to a participant to 25 percent
of the funds held in the participant's account. The trustee makes
monthly payments of $1,000 to pay the premiums due for Participant
A's health insurance. The trustee also reduces Participant A's
account balance by $1,000 at the time of each premium payment. In
June of a year, Participant A is admitted to the hospital for
covered medical care, and in July of the same year, the health
insurer pays the hospital $5,000 for the medical care provided to
Participant A in June.
(ii) Conclusion. Under paragraph (e)(1) of this section, each of
the trustee's payments of the $1,000 constitutes a distribution
under section 402(a) to Participant A on the date of each payment.
To the extent provided under section 213, the amount of these
distributions constitutes payments for medical care. The $5,000
payment to the hospital is excludable from Participant A's gross
income under section 104(a)(3) and is not treated as a distribution
from the plan.
Par. 8. Section 1.402(c)-2 is amended by redesignating paragraph A-
4(h) as paragraph A-4(i) and adding a new paragraph A-4(h) to read as
follows:
Sec. 1.402(c)-2 Eligible rollover contributions; questions and
answers.
* * * * *
A-4: * * *
(h) Distributions of premiums for accident or health insurance
under Sec. 1.402(a)-1(e).
* * * * *
Par. 9. Section 1.403(a)-1 is amended by revising paragraph (g) to
read as follows:
Sec. 1.403(a)-1 Taxability of beneficiary under a qualified annuity
plan.
* * * * *
(g) The rules of Sec. 1.402(a)-1(e) apply for purposes of
determining the treatment of amounts paid to provide accident and
health insurance benefits.
Par. 10. Section 1.403(b)-6 is amended by adding a sentence
following the first sentence of paragraph (g) to read as follows:
Sec. 1.403(b)-6 Timing of distributions and benefits.
* * * * *
(g) Death benefits and other incidental benefits. * * * The rules
of Sec. 1.402(a)-1(e) apply for purposes of determining when
incidental benefits are treated as distributed and included in gross
income. See Sec. Sec. 1.72-15 and 1.72-16. * * *
* * * * *
Linda E. Stiff,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-16084 Filed 8-17-07; 8:45 am]
BILLING CODE 4830-01-P