Final regulations - Tax treatment of medical and accidental insurance benefits under qualified plans 

May 9:  The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9665) concerning the tax treatment of payments by qualified plans for medical and accidental insurance.

Regulations proposed in August 2007 generally followed IRS policy that a distribution from a qualified plan used to pay for medical benefits is treated as a taxable distribution.


Today’s final regulations [PDF 217 KB] generally adopt the provisions of the proposed regulations with certain modifications.

Summary

Companies and individuals claimed that a transfer from a 401(k) plan account to pay for medical insurance premiums ought to be excluded under sections 105 and 106.


The final regulations clarify that a payment from a qualified plan for an accidental or health insurance premium generally constitutes a distribution under section 72 in the tax year in which the premium is paid and, thus, is taxable—unless described in certain statutory exceptions.


The final regulations do not extend this result to arrangements under which amounts are used to pay premiums for disability insurance that replaces retirement plan contributions in the event of a participant’s disability.




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