Internal Revenue Service

Department of the Treasury

Washington, DC 20224

Number: 201528004

Release Date: 7/10/2015

Index Number: 106.00-00, 3121.00-00,

3306.00-00, 3401.00-00

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Third Party Communication: None

Date of Communication: Not Applicable

Person To Contact:

----------------, ID No. ----------------

Telephone Number:

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Refer Reply To:

CC:TEGE:EB:HW

PLR-103146-15

Date:

April 06, 2015

Legend:

Taxpayer = ---------------------------------------------------------------------------------------------

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Resolution = ---------------------------------------------------------------------------------------------

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Dear -------------:

This responds to the letter from your authorized representative, dated December 29,

2014, and subsequent correspondence of February 12, 2015, requesting rulings on

behalf of Taxpayer concerning the Federal income tax treatment under sections 106,

3121, 3306 and 3401 of the Internal Revenue Code (the Code) of contributions made to

a retiree health plan on behalf of eligible retirees.

Taxpayer currently provides health coverage to eligible retirees, their spouses, their

registered domestic partners and their dependents through a choice of health plans.

Upon retirement, eligible retirees generally pay premiums for the health coverage with

their own after-tax funds. Some retirees are also eligible to have a portion of their

accumulated unused sick leave at retirement mandatorily converted to a contribution

from the employer to pay for the health insurance premiums. Contributions are uniform

and based on hours of sick leave available for conversion and the class of retiree

coverage (e.g., retiree-only coverage, retiree-plus-dependent, retiree-plus-family).

Taxpayer proposes, pursuant to Resolution, to establish a new retiree medical benefit

structure in the form of a health reimbursement arrangement for the benefit of eligible

retirees, their spouses, their registered domestic partners and their dependents (retiree

HRA). Eligible employees hired before a certain date will make an election at retirement

to participate in either (1) the existing health plans with premiums funded, in part, by

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mandatory sick leave conversion, or (2) a retiree HRA funded by mandatory conversion

of accumulated unused sick leave at retirement. Retiree HRA amounts are uniform and

based on hours of sick leave available for conversion, class of retiree coverage, and

Medicare eligibility. The election to waive coverage under the existing health plans may

not generally be changed. No other contributions, other than the sick leave conversion,

are made to the retiree HRA.

Taxpayer represents that amounts in the retiree HRA may only be used to reimburse

health insurance premiums and medical expenses as defined in section 213 of the

Code. The retiree HRA will not pay claims for registered domestic partner’s medical

expenses. Nor will the retiree HRA reimburse spouse’s group health insurance that has

been paid with pre-tax dollars.

Taxpayer represents that under no circumstance may the eligible retiree or any

beneficiary receive any conversion amounts at any time in cash or other benefits.

Following the retiree’s death, unused amounts continue for the benefit of the retiree’s

spouse, registered domestic partner and eligible dependents (children under 26). The

benefits continue until all eligible sick leave has been converted, the death of the

surviving spouse, registered domestic partner and eligible dependents, or an election to

not continue the program at which time any amounts not applied to reimburse medical

expenses are forfeited. If the eligible retiree dies and has no dependents, the sick leave

amounts are forfeited. There is no option to receive the value of the unused sick leave

in any form other than as reimbursement of medical expenses.

Section 61(a)(1) of the Code and section 1.61-21(a)(3) of the Income Tax Regulations

provide that, except as otherwise provided in Subtitle A, gross income includes

compensation for services, including fees, commissions, fringe benefits, and similar

items.

Section 1.61-21(a)(3) of the regulations provides that a fringe benefit provided in

connection with the performance of services shall be considered to have been provided

as compensation for such services.

Section 1.61-21(a)(4) of the regulations provides that, in general, a taxable fringe

benefit is included in the income of the person performing the services in connection

with which the fringe benefit is furnished. If a fringe benefit is furnished to someone

other than the service provider, such benefit is considered as furnished to the service

provider.

Section 1.61-21(b)(1) of the regulations provides that an employee must include in

gross income the fair market value of the fringe benefit.

Section 106(a) of the Code provides that the gross income of an employee does not

include employer-provided coverage under an accident or health plan. Section 1.106-1

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of the regulations states that the gross income of an employee does not include

contributions which his 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 of the Code. The employer may contribute to an accident or

health plan either by paying the premium on a policy of accident or health insurance

covering one or more of the employees, or by contributing to a separate trust or fund

which provides accident or health benefits directly or through insurance to one or more

of the employees. However, if the insurance policy, trust or fund provides other benefits

in addition to accident or health, section 106 applies only to the portion of the

contributions allocable to accident or health benefits.

Coverage provided under an accident and health plan to former employees and their

spouses and dependents is excluded from gross income under section 106. See, Rev.

Rul. 62-199, 1962-2 C.B. 38.

Notice 2002-45, 2002-2 C.B. 93, describes the tax treatment of health reimbursement

arrangements (HRAs). The notice explains that a tax-favored HRA is an arrangement

that (1) is paid for solely by the employer and not pursuant to a salary reduction election

or otherwise under a section 125 cafeteria plan; (2) reimburses the employee for

medical care expenses (as defined in section 213(d)) incurred by the employee or by

the employee’s spouse or dependents; and (3) provides reimbursements up to a

maximum dollar amount with any unused portion of that amount at the end of the

coverage period carried forward to subsequent coverage periods.

Notice 2002-45 emphasizes that employer contributions to an HRA may not be

attributable to salary reduction or otherwise provided under a section 125 cafeteria plan.

An accident and health plan funded pursuant to salary reduction is not an HRA and is

subject to the rules under section 125.

Rev. Rul. 2005-24, 2002-2 C.B. 93, describes a health reimbursement arrangement.

Situation 1 of the ruling states that when an employee retires, the employer

automatically and on a mandatory basis (as determined under the Plan) contributes an

amount to the reimbursement plan equal to the value of all or a portion of the retired

employee’s accumulated unused vacation and sick leave. The ruling concludes that the

reimbursement plan described in Situation 1 is an HRA that meets the requirements for

tax-favored treatment.

Section 3101 imposes taxes under the Federal Insurance Contributions Act (FICA) “on

the income of every individual” in an amount equal to a percentage “of the wages

received by him with respect to employment.” Section 3111 provides that the employer

portion of FICA tax is imposed directly upon the employer as “an excise tax, with

respect to having individuals in his employ.” Similarly, section 3301 provides that FUTA

tax is imposed on every employer as an excise tax with respect to individuals in his

PLR-103146-15

employ equal to a percentage of wages paid by the employer with respect to

employment.

Section 3121(a) provides for FICA purposes and section 3306(b) provides for FUTA

purposes, with certain exceptions, that the term “wages” means “all remuneration for

employment.” However, sections 3121(a)(2) and 3306(b)(2) provide that the term

“wages” does not include any payment made to or on behalf of an employee, or any of

his dependents, for medical or hospitalization expenses. Section 3401(a) provides that

for purposes of federal income tax withholding, “wages” means all remuneration for

services performed by an employee for his employer, including the cash value of any

benefits. However, Rev. Rul. 56-632, 1956-2 C.B. 101, holds that when premiums paid

by an employer under policies providing hospital and surgical services are excludable

from employees’ gross income under section 106, the amounts paid by the employer

are not subject to federal income tax withholding.

Accordingly, based on the information submitted, representations made and authorities

cited above, we conclude that:

(1) Taxpayer contributions made to the retiree HRA on behalf of eligible retirees,

spouses, and eligible dependents which are used exclusively to pay for eligible

medical expenses are excludable from the gross income of eligible retirees under

section 106 of the Code

(2) Taxpayer contributions made to the retiree HRA on behalf of eligible retirees,

spouse and eligible dependents are not “wages” and are not subject to FICA

taxes under section 3121(a), FUTA taxes under section 3306(b) or income tax

withholding under section 3401(a).

(3) Taxpayer contributions made to the retiree HRA that are used to provide medical

coverage for registered domestic partners of eligible retirees (e.g., health

insurance premiums) are included in the gross income of eligible retirees under

section 61 of the Code.

No opinion is expressed as to the federal tax consequences of the transaction under

any other section of the Code other than those specifically stated above.

This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3) of the Code

provides that it may not be used or cited as precedent.

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In accordance with the Power of Attorney on file with this office, a copy of this letter is

being sent to your authorized representative.

Sincerely,

/S/

Harry Beker

Chief, Health and Welfare Branch

Office of Associate Chief Counsel

(Tax Exempt and Government Entities)

cc: