8794 / Are benefits provided under an employer’s noninsured accident and health plan excludable from an employee’s income?
Although there is no particular legal form of plan required, uninsured benefits must be received under some sort of accident and health plan established by the employer for its employees in order to be tax-exempt on the same basis as insured plans.1 An Ohio federal District Court described the “plan” requirement as follows: “there is no legal magic to a form; the essence of the arrangement must determine its legal character.”2
A formal contract of insurance is not required if it is clear that, for an adequate consideration, the company has agreed and has become liable to pay and has paid sickness benefits based upon a reasonable plan of protection established for the benefit of its employees. For example, a provision for disability pay in an employment contract has been held to satisfy the condition.3
For tax purposes, it is not necessary for the plan to be in writing or even that an employee’s rights to benefits under the plan be enforceable. For example, a plan has been found based on an employer’s custom or policy of continuing wages during disability, which was generally known to employees.4