8794 / Are benefits provided under an employer’s noninsured accident and health plan excludable from an employee’s income?
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
If an employee’s rights are not enforceable, the employee must have been covered by a plan or a program, policy, or custom having the effect of a plan when the employee became sick or injured, and notice or knowledge of the plan must have been readily available to the employee.5 Further, for a plan to exist an employer must commit to certain rules and regulations governing payment and these rules must be made known to employees as a definite policy before accident or sickness arises. Ad hoc payments that are made at the complete discretion of an employer do not qualify as a plan.6