[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.104-1]

[Page 440-442]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.104-1  Compensation for injuries or sickness.

    (a) In general. Section 104(a) provides an exclusion from gross 
income with respect to certain amounts described in paragraphs (b), (c), 
(d) and (e) of this section, which are received for personal

[[Page 441]]

injuries or sickness, except to the extent that such amounts are 
attributable to (but not in excess of) deductions allowed under section 
213 (relating to medical, etc., expenses) for any prior taxable year. 
See section 213 and the regulations thereunder.
    (b) Amounts received under workmen's compensation acts. Section 
104(a)(1) excludes from gross income amounts which are received by an 
employee under a workmen's compensation act (such as the Longshoremen's 
and Harbor Workers' Compensation Act, 33 U.S.C., c. 18), or under a 
statute in the nature of a workmen's compensation act which provides 
compensation to employees for personal injuries or sickness incurred in 
the course of employment. Section 104(a)(1) also applies to compensation 
which is paid under a workmen's compensation act to the survivor or 
survivors of a deceased employee. However, section 104(a)(1) does not 
apply to a retirement pension or annuity to the extent that it is 
determined by reference to the employee's age or length of service, or 
the employee's prior contributions, even though the employee's 
retirement is occasioned by an occupational injury or sickness. Section 
104(a)(1) also does not apply to amounts which are received as 
compensation for a nonoccupational injury or sickness nor to amounts 
received as compensation for an occupational injury or sickness to the 
extent that they are in excess of the amount provided in the applicable 
workmen's compensation act or acts. See, however, Sec. Sec. 1.105-1 
through 1.105-5 for rules relating to exclusion of such amounts from 
gross income.
    (c) Damages received on account of personal injuries or sickness. 
Section 104(a)(2) excludes from gross income the amount of any damages 
received (whether by suit or agreement) on account of personal injuries 
or sickness. The term ``damages received (whether by suit or 
agreement)'' means an amount received (other than workmen's 
compensation) through prosecution of a legal suit or action based upon 
tort or tort type rights, or through a settlement agreement entered into 
in lieu of such prosecution.
    (d) Accident or health insurance. Section 104(a)(3) excludes from 
gross income amounts received through accident or health insurance for 
personal injuries or sickness (other than amounts received by an 
employee, to the extent that such amounts (1) are attributable to 
contributions of the employer which were not includible in the gross 
income of the employee, or (2) are paid by the employer). Similar 
treatment is also accorded to amounts received under accident or health 
plans and amounts received from sickness or disability funds. See 
section 105(e) and Sec. 1.105-5. If, therefore, an individual purchases 
a policy accident or health insurance out of his own funds, amounts 
received thereunder for personal injuries or sickness are excludable 
from his gross income under section 104(a)(3). See, however, section 213 
and the regulations thereunder as to the inclusion in gross income of 
amounts attributable to deductions allowed under section 213 for any 
prior taxable year. Section 104(a)(3) also applies to amounts received 
by an employee for personal injuries or sickness from a fund which is 
maintained exclusively by employee contributions. Conversely, if an 
employer is either the sole contributor to such a fund, or is the sole 
purchaser of a policy of accident or health insurance for his employees 
(on either a group or individual basis), the exclusion provided under 
section 104(a)(3) does not apply to any amounts received by his 
employees through such fund or insurance. If the employer and his 
employees contribute to a fund or purchase insurance which pays accident 
or health benefits to employees, section 104(a)(3) does not apply to 
amounts received thereunder by employees to the extent that such amounts 
are attributable to the employer's contributions. See Sec. 1.105-1 for 
rules relating to the determination of the amount attributable to 
employer contributions. Although amounts paid by or on behalf of an 
employer to an employee for personal injuries or sickness are not 
excludable from the employee's gross income under section 104(a)(3), 
they may be excludable therefrom under section 105. See Sec. Sec. 
1.105-1 through 1.105-5, inclusive. For treatment of accident or health 
benefits paid to or on behalf of a self- employed

[[Page 442]]

individual by a trust described in section 401(a) which is exempt under 
section 501(a) or under a plan described in section 403(a), see 
paragraph (g) of Sec. 1.72-15.
    (e) Amounts received as pensions, etc., for certain personal 
injuries or sickness. (1) Section 104(a)(4) excludes from gross income 
amounts which are received as a pension, annuity, or similar allowance 
for personal injuries or sickness resulting from active service in the 
armed forces of any country, or in the Coast and Geodetic Survey, or the 
Public Health Service. For purposes of this section, that part of the 
retired pay of a member of an armed force, computed under formula No. 1 
or 2 of 10 U.S.C. 1401, or under 10 U.S.C. 1402(d), on the basis of 
years of service, which exceeds the retired pay that he would receive if 
it were computed on the basis of percentage of disability is not 
considered as a pension, annuity, or similar allowance for personal 
injury or sickness, resulting from active service in the armed forces of 
any country, or in the Coast and Geodetic Survey, or the Public Health 
Service (see 10 U.S.C. 1403 (formerly 37 U.S.C. 272(h), section 402(h) 
of the Career Compensation Act of 1949)). See paragraph (a)(3)(i)(a) of 
Sec. 1.105-4 for the treatment of retired pay in excess of the part 
computed on the basis of percentage of disability as amounts received 
through a wage continuation plan. For the rules relating to certain 
reduced uniformed services retirement pay, see paragraph (c)(2) of Sec. 
1.122-1. For rules relating to a waiver by a member or former member of 
the uniformed services of a portion of disability retired pay in favor 
of a pension or compensation receivable under the laws administered by 
the Veterans Administration (38 U.S.C. 3105), see Sec. 1.122-1(c)(3). 
For rules relating to a reduction of the disability retired pay of a 
member or former member of the uniformed services under the Dual 
Compensation Act of 1964 (5 U.S.C. 5531) by reason of Federal 
employment, see Sec. 1.122-1(c)(4).
    (2) Section 104(a)(4) excludes from gross income amounts which are 
received by a participant in the Foreign Service Retirement and 
Disability System in a taxable year of such participant ending after 
September 8, 1960, as a disability annuity payable under the provisions 
of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C. 
1081; 60 Stat. 1021). However, if any amount is received by a survivor 
of a disabled or incapacitated participant, such amount is not excluded 
from gross income by reason of the provisions of section 104(a)(4).

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5070, Apr. 14, 1964; T.D. 7043, 35 FR 8477, June 2, 1970]