[Federal Register Volume 72, Number 160 (Monday, August 20, 2007)]
[Proposed Rules]
[Pages 46421-46426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-16084]


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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