351 / Are wage continuation payments under an accident and health plan subject to withholding?

Amounts paid as sick pay during a temporary absence under a plan to which the employer is a party may be withheld by a third party payor at the employee’s request.²

Amounts paid by a third party are wages subject to mandatory withholding if the insurance risk is not shifted by the arrangement because the third party is acting as the employer’s agent if the employer reimburses the insurance company or trust on a cost plus fee basis.³

1. Treas. Reg. § 31.3401(a)-1(b)(8); Rev. Rul. 77-89, 1977-1 CB 300.

2. IRC § 3402(o); Treas. Reg. § 31.3402(o)-3.