[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: 26CFR1.105-1]

[Page 442-445]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.105-1  Amounts attributable to employer contributions.

    (a) In general. Under section 105(a), amounts received by an 
employee through accident or health insurance for personal injuries or 
sickness must be included in his gross income 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, unless such amounts are excluded therefrom under section 
105(b), (c), or (d). For purposes of this section, the term ``amounts 
received by an employee through an accident or health plan'' refers to 
any amounts received through accident or health insurance, and also to 
any amounts which, under section 105(e), are treated as being so 
received. See Sec. 1.105-5. In determining the extent to which amounts 
received for personal injuries or sickness by an employee through an 
accident or health plan are subject to the provisions of section 105(a), 
rather than section 104(a)(3), the provisions of paragraphs (b), (c), 
(d), and (e) of this section shall apply. A self-employed individual is 
not an employee for purposes of section 105 and Sec. Sec. 1.105-1 
through 1.105-5. See paragraph (g) of Sec. 1.72-15. Thus, such an 
individual will not be treated as an employee with respect to benefits 
described in section 105 received from a plan in which he participates 
as an employee within the meaning of section 401(c)(1) at the time he, 
his spouse, or any of his dependents becomes entitled to receive such 
benefits.
    (b) Noncontributory plans. All amounts received by employees through 
an accident or health plan which is financed solely by their employer, 
either by payment of premiums

[[Page 443]]

on an accident or health insurance policy (whether on a group or 
individual basis), by contributions to a fund which pays accident or 
health benefits, or by direct payment of the benefits under the plan, 
are subject to the provisions of section 105(a), except to the extent 
that they are excludable under section 105(b), (c), or (d). This rule 
may be illustrated by the following examples:

    Example (1). Employer A maintains a plan for his employees which 
provides that he will continue to pay regular wages to employees who are 
absent from work due to sickness or personal injuries. Employees make no 
contributions to the plan and all benefits are paid by the employer. 
Amounts received by employees under the plan are subject to section 
105(a), and must be included in gross income unless excluded therefrom 
under section 105(b), (c), or (d).
    Example (2). Pursuant to a State nonoccupational disability benefits 
law, employer B maintains an accident and health plan for his employees. 
Although under the State law B is authorized to withhold from his 
employees' wages a specified amount for employee contributions to the 
State fund, in actual practice B does not so withhold and makes all 
contributions out of his own funds. All amounts received by B's 
employees from the State fund are subject to section 105(a), and must be 
included in gross income unless excluded therefrom under section 105 
(b), (c), or (d).

    (c) Contributory plans. (1) In the case of amounts received by an 
employee through an accident or health plan which is financed partially 
by his employer and partially by contributions of the employee, section 
105(a) applies to the extent that such amounts are attributable to 
contributions of the employer which were not includible in the 
employee's gross income. The portion of such amounts which is 
attributable to such contributions of the employer shall be determined 
in accordance with paragraph (d) of this section in the case of an 
insured plan, or paragraph (e) of this section in the case of a 
noninsured plan. As used in this section, the phrase ``contributions of 
the employer'' means employer contributions which were not includible in 
the gross income of the employee. See section 106 for the exclusion from 
an employee's gross income of employer contributions to accident or 
health plans.
    (2) A separate determination of the portion of the amounts received 
under the accident or health plan which is attributable to the 
contributions of the employer shall be made with respect to each class 
of employees in any case where the plan provides that some classes of 
covered employees contribute but others do not, or that the employer 
will make different contributions for different classes of employees, or 
that different classes of employees will make different contributions, 
and where in any such case both the contributions of the employer on 
account of each such class of employees and the contributions of such 
class of employees can be ascertained. For example, if employees 
contribute during the first year of employment but not thereafter, there 
will have to be a separate determination for first year employees, 
provided that the amount of the contributions of the employer on account 
of first-year employees and the contributions of such first-year 
employees can be ascertained for the required periods to apply the rules 
of paragraph (d) or (e) of this section. If in such a case the 
contributions of the employer to the plan on account of first-year 
employees are not distinguishable from his other contributions to the 
plan, then the determination shall be made for all employees under the 
plan, and such determination shall be used by all employees under the 
plan.
    (3) Except as provided in paragraph (c)(2) of Sec. 1.72-15, if the 
plan provides accident or health benefits as well as other benefits for 
the employees, and if the respective contributions made by the employer 
and the employees to provide the accident or health benefits cannot be 
ascertained, the determination of the portion of the accident or health 
benefits received under such plan which is attributable to the 
contributions of the employer shall be made in accordance with the rules 
of paragraph (d) or (e) of this section on the basis of the 
contributions of the employer and of the employees to the entire plan.
    (4) A determination of the portion attributable to the contributions 
of the employer, once made in accordance with the rules of this section, 
shall as

[[Page 444]]

to such portion be used for all purposes. For example, if an employee 
receives amounts under a wage continuation plan during the month of 
January and terminates his services during February, the portion of such 
amounts which is attributable to the contributions of the employer may 
be determined in order to provide the employee with such information at 
the time he is provided his Form W-2. The determination made for such 
purpose will also be used by the employee to report his income for his 
taxable year in which such amounts are received, without regard to the 
experience under the plan for the rest of the year.
    (d) Insured plans--(1) Individual policies. If an amount is received 
from an insurance company by an employee under an individual policy of 
accident or health insurance purchased by contributions of the employer 
and the employee, the portion of the amount received which is 
attributable to the employer's contributions shall be an amount which 
bears the same ratio to the amount received as the portion of the 
premiums paid by the employer for the current policy year bears to the 
total premiums paid by the employer and the employee for that year. This 
rule may be illustrated by the following example:

    Example. Employer A maintains a plan whereby he pays two-thirds of 
the annual premium cost on individual policies of accident and health 
insurance for his employees. The remainder of each employee's premium is 
paid by a payroll deduction from the wages of the employee. The annual 
premium for employee X is $24, of which $16 is paid by the employer. 
Thus, 16/24 or two-thirds of all amounts received by X under such 
insurance policy are attributable to the contributions of the employer 
and are subject to section 105(a), and the remaining one-third of such 
amounts is excludable from X's gross income under section 104(a)(3).

    (2) Group policies. If the accident or health coverage is provided 
under or is a part of a group insurance policy purchased by 
contributions of the employer and of the employees, and the net premiums 
for such coverage for a period of at least three policy years are known 
at the beginning of the calendar year, the portion of any amount 
received by an employee which is attributable to the contributions of 
the employer for such coverage shall be an amount which bears the same 
ratio to the amount received as the portion of the net premiums 
contributed by the employer for the last three policy years which are 
known at the beginning of the calendar year, bears to the total of the 
net premiums contributed by the employer and all employees for such 
policy years. If the net premiums for such coverage for a period of at 
least three policy years are not known at the beginning of the calendar 
year but are known for at least one policy year, such determination 
shall be made by using the net premiums for such coverage which are 
known at the beginning of the calendar year. If the net premiums for 
such coverage are not known at the beginning of the calendar year for 
even one policy year, such determination shall be made by using either 
(i) a reasonable estimate of the net premiums for the first policy year, 
or (ii) if the net premiums for a policy year are ascertained during the 
calendar year, by using such net premiums. These rules may be 
illustrated by the following example:

    Example. An employer maintains a plan under which a portion of the 
cost of a group policy of accident and health insurance for his 
employees is paid through payroll deductions from wages of the 
employees. The remainder of the cost is borne by the employer. The 
policy year begins on November 1 and ends on October 31. The net premium 
for the policy year ended October 31, 1954, is not known on January 1, 
1955, because certain retroactive premium adjustments, such as dividends 
and credits, are not determinable until after January 1. Therefore, for 
purposes of this computation the last three policy years are the policy 
years ended October 31, 1951, 1952, and 1953. The net premium for the 
policy year ended October 31, 1953, was $8,000, of which the employer 
contributed $3,000; the net premium for the policy year ended October 
31, 1952, was $9,000, of which the employer contributed $3,500; and the 
net premium for the policy year ended October 31, 1951, was $7,000, of 
which the employer contributed $1,500. The portion of any amount 
received under the policy by an employee at any time during 1955 which 
is attributable to the contributions of the employer is to be determined 
by using the ratio of $8,000 ($3,000 plus $3,500 plus $1,500) to $24,000 
($8,000 plus $9,000 plus $7,000. Thus, $8,000 / $24,000 or one-third, of 
the amounts received by an employee at any time during

[[Page 445]]

1955 is attributable to contributions of the employer.

    (e) Noninsured plans. If the accident or health benefits are a part 
of a noninsured plan to which the employer and the employees contribute, 
and such plan has been in effect for at least three years before the 
beginning of the calendar year, the portion of the amount received which 
is attributable to the employer's contributions shall be an amount which 
bears the same ratio to the amount received as the contributions of the 
employer for the period of three calendar years next preceding the year 
of receipt bear to the total contributions of the employer and all the 
employees for such period. If, at the beginning of the calendar year of 
receipt, such plan has not been in effect for three years but has been 
in effect for at least one year, such determination shall be based upon 
the contributions made during the 1-year or 2-year period during which 
the plan has been in effect. If such plan has not been in effect for one 
full year at the beginning of the calendar year of receipt, such 
determination may be based upon the portion of the year of receipt 
preceding the time when the determination is made, or such determination 
may be made periodically (such as monthly or quarterly) and used 
throughout the succeeding period. For example, if an employee terminates 
his services on April 15, 1955, and 1955 is the first year the plan has 
been in effect, such determination may be based upon the contributions 
of the employer and the employees during the period beginning with 
January 1 and ending with April 15, or during the month of March, or 
during the quarter consisting of January, February, and March.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5071, Apr. 14, 1964]