The IRS has issued final regulations that clarify the taxtreatment of premium payments paid by qualified definedcontribution plans for accident and health insurance where suchpayments are charged against participants' planaccounts.
Included within the final regulations is a new rule governing thetax treatment of premiums paid by defined contribution plans (andcharged against participants' account) for disability insurancethat provides replacement plan contributions when a participantbecomes disabled.
The final regulations are effective for plan years beginning on orafter Jan. 1, 2015, but taxpayers may elect to apply theregulations to earlier taxable years.
- The insurance policy provides for proceeds to be paid to theplan if the employee becomes unable to continueemployment because of disability;
- Proceeds from the insurance policy are credited to theparticipant's plan account; and
- The amount payable under the insurance policy does not exceedthe reasonably expected annual contributions that the participantwould have made or received during the period of disability,reduced by any other contributions made on the employee's behalfduring the disability period. (Future salary increases that theparticipant would otherwise have received during the period of thedisability may be considered in determining the "reasonablyexpected" amount of the contribution that the participant wouldhave made.)
- Pre-tax contributions that a participant would otherwise havemade during the period of disability;
- Any related employer-paid matching contributions the employeewould have received; and
- Any employer non-elective (or profit sharing)contributions.
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