Section

[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: 26CFR1.105-4]

[Page 446-459]

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)

PART 1_INCOME TAXES--Table of Contents

Sec. 1.105-4 Wage continuation plans.

(a) In general. (1) Subject to the limitations provided in this
section, section 105(d) provides an exclusion from gross income with
respect to amounts referred to in section 105(a) which are paid to an
employee through a wage continuation plan and which constitute wages or
payments in lieu of wages for a period during which the employee is
absent from work on account of personal injuries or sickness.
(2)(i) Section 105(d) is applicable only if the wages or payments in
lieu of wages are paid pursuant to a wage continuation plan. (See Sec.
1.105-6 for special rules for employees retired before January 27,
1975). The term ``wage continuation plan'' means an accident or health
plan, as defined in Sec. 1.105-5, under which wages, or payments in
lieu of wages, are paid to an employee for a period during which he is
absent from work on account of a personal injury or sickness. Such term
includes plans under which payments are continued as long as the
employee is absent from work on account of personal injury or sickness.
It includes plans under which there is a limitation on the period for
which benefits will be paid, such as 13 or 26 weeks, and also plans
under which benefits are continued until the employee is either able to
return to work or reaches mandatory retirement age. Such term also
includes a plan under which wages or payments in lieu of wages are paid
to an employee who is absent from work on account of personal injury or
sickness, even though the plan also provides that wages or payments in
lieu of wages may be paid to an employee who is absent from work for
reasons other than a personal injury or sickness.
(ii) Section 105(d) is applicable if, and only if, the employee is
absent from work and such absence is due to a personal injury or
sickness. Thus, if an employer has a plan for continuing the wages of
employees when they are absent from work, regardless of the cause of the
absence from work, section 105(d) is applicable to any payments made
under this plan to an employee whose absence from work is in fact due to
a personal injury or sickness. On the other hand, although the terms of
a plan provide that benefits are to be continued only as long as the
employee is absent from work on account of a personal injury or
sickness, section 105(d) does not apply to payments made to an employee
for a period of absence from work where such absence is not in fact due
to a personal injury or sickness.
(3)(i)(A) Section 105(d) applies only to amounts attributable to
periods during which the employee would be at work were it not for a
personal injury or sickness. Thus, an employee is not absent from work
if he is not expected to

[[Page 447]]

work because, for example, he has reached mandatory retirement age. If a
plan provides that an employee, who is absent from work on account of a
personal injury or sickness, will receive a disability pension or
annuity as long as he is disabled, section 105(d) is applicable to any
payments that he receives under this plan before reaching mandatory
retirement age, as defined in paragraph (a)(3)(i)(B) of this section.
Thus, section 105(d) would not apply to the payments that an employee
receives after reaching mandatory retirement age. The disability retired
pay received by a member on the retired list pursuant to section 402 of
the Career Compensation Act of 1949 (63 Stat. 802) or chapter 61 of
title 10, United States Code (10 U.S.C. 1201 et seq.) which is in excess
of the amounts excludable under section 104(a)(4) and paragraph (e) of
Sec. 1.104-1 shall be excluded from gross income subject to the
limitations of section 105(d) and this section, if such pay is received
before the member reaches mandatory retirement age. See Sec. 1.72-15
for additional rules relating to the tax treatment of disability
pensions. 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).
(B) The term ``mandatory retirement age'' as used in paragraph
(a)(3)(i)(A) of this section means the age set by an employer for the
mandatory retirement of employees in the class to which the taxpayer
last belonged, unless such age has been set at an age higher than that
at which it has been the practice of the employer to terminate, due to
age, the services of such employees, or for purposes of tax avoidance.
Where no age is set for mandatory retirement, such term means age 65,
or, if higher, the age at which it has been the practice of the employer
to terminate, due to age, the services of the class of employees to
which the taxpayer last belonged.
(ii) Similarly, an employee who incurs a personal injury or sickness
during his paid vacation is not allowed to exclude under section 105(d)
any of the vacation pay which he receives, since he is not absent from
work on account of the personal injury or sickness. Likewise, a teacher
who becomes sick during the summer or other vacation period when he is
not expected to teach, is not entitled to any exclusion under section
105(d) for the summer or vacation period. However, if an employee who
would otherwise be at work during a particular period is absent from
work and his absence is in fact due to a personal injury or sickness, a
payment which he receives for such period under a wage continuation plan
is subject to section 105(d).
(4) A period of absence from work shall commence the moment the
employee first becomes absent from work and shall end the moment the
employee first returns to work. However, the exclusion provided under
section 105(d) is applicable only to payments attributable to a period
of absence from work which is due to a personal injury or sickness, and
to payments attributable to a period when the employee would have been
at work but for such personal injury or sickness.
(5) For the purpose of section 105(d), whether an employee is absent
from work depends upon all the circumstances. For example, an employee,
who is a farm hand and who lives upon the premises of his employer, is
absent from work when he is unable to work even though he remains on the
premises of his employer. A member of the Armed Forces, who on a
particular day has no assigned duties but to stand ready for duty, is
absent from work if he is unable to answer any duty call that may be
made upon him. An employee is not absent from work when he performs any
services for his employer at his usual place or places of employment,
whether or not the services are the usual services performed by the
employee. Furthermore, the employee is not absent from work when he
performs substantial services for his employer, even though they are
performed at a place other than his usual place of employment. Thus, if
an employee returns to his usual place or places of employment and
performs any services for his employer, he has

[[Page 448]]

returned to work, but if he merely holds occasional short conferences
concerning his work with other employees or clients while hospitalized
or at home recuperating, such conferences do not constitute a return to
work.
(b) Determination of amount attributable to period of absence. The
amount which is paid to an employee as wages or payments in lieu of
wages for a period of absence from work due to a personal injury or
sickness shall be determined by reference to the plan under which the
amount is paid, and to the contract, statute, or regulation which
provides the terms of the employment. However, unless the plan,
contract, statute, or regulation provides otherwise, it will be presumed
that no wages or plan benefits are attributable to days (or portions of
days) which are not normal working days for the particular employee.
Also, section 105(d) does not apply to amounts earned prior to or
subsequent to the period of absence from work, even though received
during such period. These rules may be illustrated by the following
examples:

Example (1). Employee A, who receives regular wages of $70 per week,
normally works five days (Monday through Friday) during each week. A is
absent from work on a Friday and the succeeding Monday (two working
days) on account of a personal injury, but receives his regular wages
with respect to such period of absence under his employer's accident and
health plan. Unless the plan of A's employer, or the contract, statute,
or regulation under which A is employed, provides otherwise, it will be
presumed that A is not paid with respect to nonworking days (Saturday
and Sunday). Therefore, the amount received by A with respect to his
period of absence from work due to injury is $28, which is two days
regular wages. If the plan, or the employment contract, statute, or
regulation had provided that wages were paid on a 7-day per week basis
and that A must be available for call to work on Saturday and Sunday,
A's daily wage would have been $10, and the amount attributable to the
period of absence would have been $40 ($10 per day for four days).
Example (2). Employee B is a salesman who is paid on a commission
basis. The employer purchases for B an accident and health insurance
policy which provides that B shall receive $50 per week during any
period (after a 7-day waiting period) that he is unable to work due to
personal injuries or sickness. B incurs a personal injury and is
incapacitated for two weeks. He receives $50 under the insurance policy
with respect to the second week of absence. In addition, during the 2-
week period of absence he receives a check for $40 from his employer as
his commission on a sale which he made before becoming incapacitated.
Section 105(d) applies to the $50 received through the insurance policy,
but does not apply to the $40 commission which B earned prior to the
period of absence from work.

(c) Limitation in the case of absence from work due to sickness for
periods commencing prior to January 1, 1964. (1) In the case of a period
of absence from work on account of sickness commencing prior to January
1, 1964, the exclusion provided by section 105(d) does not apply to
amounts attributable to the first seven calendar days of each such
period, unless the employee is hospitalized on account of sickness for
at least one day during the period of absence from work. This 7-day rule
applies to each period of absence from work because of sickness,
regardless of the frequency of such absences or the closeness in time to
any prior period of absence from work because of sickness. For example,
employee A becomes absent from work because of sickness on Friday,
October 4, 1963, and returns to work on the morning of Monday, October
14, 1963. He suffers a relapse and again becomes absent from work on the
afternoon of Monday, October 14, 1963. A's return to work on the morning
of Monday, October 14, 1963, terminates the first period of absence from
work because of sickness, and a new period of absence from work because
of sickness begins on the afternoon of Monday, October 14, 1963. The 7-
day limitation does not apply if the absence from work is due to
personal injury. These rules may be illustrated by the following
examples:

Example (1). Employee C normally works five days (Monday through
Friday) during each week. On Saturday, October 5, 1963 (a nonworking
day), C becomes sick and as a result, he does not return to work until
Thursday, October 17, 1963. The period of absence from work due to
sickness commences on Monday, October 7, 1963, and terminates when C
returns to work on Thursday, October 17, 1963. If C is not hospitalized
during such period of absence from work, section 105(d) does not apply
to amounts which C receives under his employer's wage continuation plan
attributable to the 7-day period commencing Monday, October 7, 1963, and
ending Sunday, October 13, 1963, inclusive.

[[Page 449]]

Example (2). Employee D incurs a personal injury which causes him to
be absent from work two days. His regular wages are continued during
this period in accordance with the wage continuation plan of his
employer. Since D's absence from work was due to a personal injury,
rather than a sickness, the 7-day waiting period does not apply, and,
subject to the other requirements of section 105(d), D is entitled to an
exclusion with respect to the amounts received under the employer's plan
attributable to the 2-day period of absence.

(2) For the purpose of starting the 7-day waiting period, if the
period of absence due to sickness commences after the start of a working
day, the amount received with respect to the portion of such day that
the employee is absent from work shall be considered the amount
attributable to the first calendar day of the period of absence from
work due to sickness. This rule may be illustrated by the following
example:

Example. Employee E normally works from 9 a.m. until 5:30 p.m. on
five days (Monday through Friday) during each week. From noon on Friday,
September 6, 1963, until noon on Monday, September 16, 1963, E is absent
from work on account of sickness but is not hospitalized at any time
during this period. Section 105(d) does not apply to amounts received by
E under his employer's wage continuation plan which are attributable to
the calendar period beginning September 6, 1963, and ending September
12, 1963, inclusive. However, if the other requirements of section
105(d) are met, E may exclude from gross income amounts attributable to
the period beginning September 13, 1963, and ending at noon on September
16, 1963, inclusive.

(3) If the absence from work is due to sickness, the amount
attributable to the first seven calendar days of such absence includes
all amounts paid for such seven calendar days, regardless of the number
of work days included in such seven calendar days. For example, if one
of such seven calendar days an employee would have worked two 8-hour
shifts, the amount he is paid for the two shifts is considered to be an
amount attributable to only one calendar day.
(4) An employee is considered to be hospitalized for one day only if
he is admitted to and confined in a hospital as a bed patient for at
least one hospital day. Entry into a hospital as an in-and-out patient
does not constitute hospitalization for purposes of section 105(d). The
same applies to mere entry into the outpatient ward or the emergency
ward of a hospital.
(d) Exclusion not applicable to the extent that amounts exceed a
weekly rate of $100 for periods of absence commencing prior to January
1, 1964--(1) In general. Amounts received under a wage continuation
plan, attributable to periods of absence commencing before January 1,
1964, which are not excludable from gross income as being attributable
to contributions of the employee (see Sec. 1.105-1) must be included in
gross income under section 105(d) to the extent that the weekly rate of
such amounts exceeds $100. Thus, an employee, who receives $50 under his
employer's wage continuation plan on account of his being absent from
work for two days due to a personal injury, cannot exclude the entire
$50 under section 105(d) if the weekly rate of such benefits exceeds
$100. If an employee receives payments under a wage continuation plan
for less than a full pay period, the excludability of such payments
shall be determined under subparagraph (2) of this paragraph. In all
other cases, the weekly rate and excludability of such payments under a
wage continuation plan shall be determined under subparagraph (3) of
this paragraph. If, with respect to any pay period or portion thereof,
the employee receives amounts under two or more wage continuation plans
(whether such plans are maintained by or for the same employer or by
different employers), the weekly rate and excludability of amounts
received under each plan shall be determined under subparagraph (3) of
this paragraph and the weekly rate for purposes of section 105(d) shall
be the sum of all such weekly rates. This rule may be illustrated by the
following examples:

Example (1). An employee whose weekly salary is $120 is covered by
two wage continuation plans maintained by his employer. Plan A is a
contributory insured plan to which the employee contributes 60 percent
of the premiums and which provides a weekly payment of $30. Plan B is a
salary continuation plan completely financed by the employer. Since 60
percent of the cost of plan A is contributed by the employee, 60 percent
of the weekly payment of $30 ($18) is excluded from gross income under
section 104(a)(3). The remainder of each weekly payment ($12)

[[Page 450]]

is the weekly rate of plan A. Since the employer pays the entire cost of
plan B, the weekly rate of this plan is the total amount paid per week.
In the case of an employee whose weekly wages of $120 are continued
under plan B, the weekly rate for the employee for purposes of section
105(d) is $132 ($120 from plan B, plus $12 from plan A).
Example (2). Assume in Example (1) that plan A provides a waiting
period of four calendar days while plan B is effective immediately. For
the first four days of absence the weekly rate for purposes of section
105(d) is $120, and for periods after the first four days the weekly
rate for purposes of section 105(d) is $132.

(2) Daily exclusion. If an employee receives payments under a wage
continuation plan for less than a full pay period, the extent to which
such benefits are excludable under section 105(d) shall be determined by
computing the daily rate of the benefits which can be excluded under
section 105(d). Such daily rate is determined by dividing the weekly
rate at which wage continuation payments are excludable ($100) by the
number of work days in a normal work week. This rule may be illustrated
by the following example:

Example. Employee E is covered by a wage continuation plan
maintained by his employer providing that E's regular salary of $220
semimonthly will be continued in case he is absent from work on account
of a personal injury or sickness. E is absent from work on account of a
personal injury for three days and under the plan he received $66 as
wage continuation payments. The extent to which the $66 is excludable
under section 105(d) shall be determined by dividing $100 by 5, the
number of work days in a normal work week for E, resulting in a daily
exclusion of $20 and a total exclusion of $60.

(3) Determination of weekly rate at which amounts are paid under a
wage continuation plan. (i) For purposes of this subparagraph the pay
period of a particular wage continuation plan shall be determined by
reference to such plan. If, in the usual operation of the plan, benefits
are paid for the same periods as regular wages, then the pay period of
such benefits shall be the period for which a payment of wages is
ordinarily made to the employee by the employer. If plan benefits are
ordinarily paid for different periods than regular wages then the pay
period of such benefits shall be the period for which payment of such
benefits is ordinarily made.
(ii) The weekly rate shall be determined in accordance with the
following rules:
(a) Weekly pay period. If benefits are paid on the basis of a weekly
pay period, the weekly rate at which such benefits are paid shall be the
weekly amount of such benefits.
(b) Biweekly pay period. If benefits are paid on the basis of a
biweekly pay period, the weekly rate at which such benefits are paid
shall be one-half of the biweekly rate.
(c) Semimonthly pay period. If benefits are paid on the basis of a
semimonthly pay period, the weekly rate at which such benefits are paid
shall be the semimonthly rate multiplied by 24 and divided by 52.
(d) Monthly pay period. If benefits are paid on the basis of a
monthly pay period, the weekly rate at which such benefits are paid
shall be the monthly rate multiplied by 12 and divided by 52.
(e) Other pay periods. If benefits are paid on the basis of a period
other than a period described in (a) through (d), of this subdivision
the weekly rate at which such benefits are paid shall be determined by
ascertaining the annual rate at which such benefits are paid and
dividing such annual rate by 52.
(f) Examples. The operation of the rules of this subdivision may be
illustrated by the following examples:

Example (1). A's employer maintains a noncontributory plan which
provides for the continuation of regular salary during periods of
absence from work due to personal injury or sickness. A, an office
employee, receives regular salary of $520 per month, and he is paid on
the basis of a monthly pay period. Since benefits under the salary
continuation plan are paid for the same periods as regular salary, the
pay period of the plan is monthly. For purposes of section 105(d), the
weekly rate at which benefits are paid to A under the plan is $120,
determined as follows:

$520 (monthly rate)x12................. $6,240 (annual rate).
$6,240/52.............................. $120 (weekly rate).

Example (2). B, a factory employee of the same employer, is paid
regular wages on the basis of a 10-day pay period. B's regular wages are
$200 per pay period. If B is absent from work for 15 days, the weekly
rate of the amount he receives under his employer's plan will be
determined as follows:

365x$200/10............................ $7,300 (annual rate).
$7,300/52.............................. $140.38 (weekly rate).

[[Page 451]]

(iii) If the weekly rate for purposes of section 105(d) (as
determined in subdivision (ii) of this subparagraph) does not exceed
$100, the amount received which is not attributable to the 7-day waiting
period described in paragraph (c) of this section is fully excludable
from gross income. If the weekly rate for purposes of section 105(d) (as
determined in subdivision (ii) of this subparagraph) exceeds $100, the
amount received which is not attributable to the 7-day waiting period
provided in paragraph (c) of this section is only partially excludable.
The excludable portion of such amount shall bear the same ratio to such
amount as $100 bears to the weekly rate for purposes of section 105(d).
This rule may be illustrated by the following example:

Example. The weekly rate of benefits in the case of employee A in
example (1) of subdivision (ii) of this subparagraph was $120. If A does
not receive amounts under any other plan, this is the weekly rate for
purposes of section 105(d). Assume that A is absent from work on account
of a personal injury for one full month and receives full pay of $520
for such period of absence. Since there is no waiting period
requirement, the exclusion is $433.33 computed as follows:

$100/$120x$520 or $433.33.

(e) Limitation in the case of absence from work on account of
personal injury or sickness for periods commencing after December 31,
1963. (1) In the case of periods of absence from work on account of
sickness or personal injury commencing after December 31, 1963, the
exclusion provided by section 105(d) does not apply to amounts
attributable to the first 30 calendar days of each such period, if such
amounts are at a rate which exceeds 75 percent of the employee's
``regular weekly rate of wages'', as determined under subparagraph (5)
of this paragraph. If the amounts are at a rate of 75 percent or less of
the employee's ``regular weekly rate of wages'', the exclusion provided
by section 105(d) does not apply to amounts attributable to the first 7
calendar days of each such period, unless the employee is hospitalized
on account of personal injury or sickness for at least one day during
the period of absence from work. The 7- or 30-day waiting period
(whichever is applicable) applies to each period of absence from work
because of personal injury or sickness, regardless of the frequency of
such absences or the closeness in time to any prior period of absence
from work because of personal injury or sickness. The waiting period is
to be counted by beginning with the first work day for which the
employee was absent. These rules may be illustrated by the following
examples:

Example (1). Employee A is absent from work because of sickness on
Tuesday, January 7, 1964, and returns to work on the morning of
Thursday, February 13, 1964. He suffers a relapse and again becomes
absent from work on the afternoon of Thursday, February 13, 1964. A's
return to work on the morning of Thursday, February 13, 1964, terminates
the first period of absence from work because of sickness, and a new
period of absence from work because of sickness begins on the afternoon
of Thursday, February 13, 1964.
Example (2). Employee B normally works five days (Monday through
Friday) during each week. On Saturday, January 11, 1964 (a nonworking
day), B becomes sick or injured and as a result he does not return to
work until Monday, February 17, 1964. The period of absence from work
commences on Monday, January 13, 1964, and terminates when B returns to
work on Monday, February 17, 1964. Assuming B receives amounts under his
employer's wage continuation plan at a rate exceeding 75 percent of his
``regular weekly rate of wages'' (as determined under subparagraph (5)
of this paragraph), the exclusion provided by section 105(d) does not
apply to amounts B receives under his employer's wage continuation plan
which are attributable to the 30-day period commencing Monday, January
13, 1964, and ending Tuesday, February 11, 1964, inclusive. If B
receives amounts under his employer's wage continuation plan at a rate
which is 75 percent or less of his ``regular weekly rate of wages'' and
he is not hospitalized during the period of absence from work, the
exclusion provided by section 105(d) does not apply to amounts B
receives which are attributable to the 7-day period commencing Monday,
January 13, 1964, and ending Sunday, January 19, 1964, inclusive.
Example (3). Employee C is sick or incurs a personal injury which
causes him to be absent from work for two weeks. He receives amounts
under his employer's wage continuation plan at a rate which is 75
percent or less of his ``regular weekly rate of wages'' (as determined
under subparagraph (5) of this paragraph) and is hospitalized from the
eighth through the eleventh day of his absence. Since C was hospitalized
on account of personal injury or sickness for at least one day during
the period of absence, the 7-day

[[Page 452]]

waiting period does not apply, and, subject to the other requirements of
section 105(d), C is entitled to an exclusion with respect to the
amounts received under his employer's plan attributable to the two- week
period of absence. If C were receiving amounts under his employer's wage
continuation plan at a rate exceeding 75 percent of his ``regular weekly
rate of wages'', he would not be entitled to an exclusion under section
105(d).

(2) For the purpose of starting the 7- or 30-day waiting period,
whichever is applicable, if the period of absence commences after the
start of a working day, the amount received with respect to the portion
of such day that the employee is absent from work shall be considered an
amount attributable to the first calendar day of the period of absence
from work. This rule may be illustrated by the following example:

Example. Employee D normally works from 9 a.m. until 5:30 p.m. on
five days (Monday through Friday) during each week. From noon on
Wednesday, January 8, 1964, until noon on Monday, February 17, 1964, D
is absent from work on account of personal injury or sickness but is not
hospitalized at any time during this period. D receives amounts under
his employer's wage continuation plan at a rate not exceeding 75 percent
of his ``regular weekly rate of wages'' (as determined under
subparagraph (5) of this paragraph). Section 105(d) does not apply to
amounts received by D under his employer's wage continuation plan which
are attributable to the calendar period beginning January 8, 1964, and
continuing through January 14, 1964, inclusive. However, if the other
requirements of section 105(d) are met, D may exclude from gross income
amounts attributable to the remainder of the period of absence, ending
at noon on Monday, February 17, 1964.

(3) If the exclusion is subject to a 7- or 30-calendar-day waiting
period, any amount attributable to such 7- or 30- calendar-day waiting
period includes all amounts paid therefor, regardless of the number of
work days included in such 7 or 30 calendar days. For example, if on one
of the days included in the waiting period, an employee would have
worked two 8-hour shifts, the amount he is paid for the two shifts is
considered to be attributable to only one calendar day.
(4) An employee is considered to be hospitalized for one day only if
he is admitted to and confined in a hospital as a bed patient for at
least one hospital day. Entry into a hospital as an in-and-out-patient
does not constitute hospitalization for purposes of section 105(d). The
same applies to mere entry into the out-patient ward or the emergency
ward of a hospital.
(5)(i) In general, the ``regular weekly rate of wages'', for
purposes of section 105(d), shall be the average weekly wages paid for
the last four weekly periods falling within a full pay period or full
pay periods immediately preceding the commencement of the period of
absence. If the employee was absent from work for three or more normal
working days during any such pay period, and the amount of wages paid
for such pay period was less than the amount of wages paid for the
immediately preceding pay period during which the employee was not
absent from work for three or more normal working days, then the amount
of wages paid for the weekly period or weekly periods falling wholly or
partly within the pay period during which each such absence occurred
shall not be used in the determination of ``regular weekly rate of
wages''. In such a case, there shall be substituted the amount of wages
paid for the last weekly period or weekly periods falling within the pay
period or pay periods immediately preceding the pay period or pay
periods in which such absence or absences occurred during which the
employee was not absent from work for three or more normal working days.
(a) In order to compute wages paid for the last four weekly periods
falling within a full pay period or full pay periods immediately
preceding the commencement of the period of absence, or any substituted
weekly periods therefor, it will be necessary to convert the wages paid
for any pay period other than a weekly pay period into a weekly rate or
weekly rates of payment of such wages in accordance with the rules
stated in subdivision (iv) of this subparagraph. Such weekly rate or
weekly rates of wage payments are then used in determining the wages for
the last four weekly periods falling within a full pay period or full
pay periods immediately preceding the commencement of the period of
absence, or any substituted weekly periods therefor.

[[Page 453]]

(b) If the employee does not have four weekly periods falling within
a full pay period or full pay periods preceding his absence during which
he was not absent from work for three or more normal working days, then
the greatest number of available weekly periods shall be used,
consistent with the rules set forth in this subdivision (i), in
determining the ``regular weekly rate of wages.''
(c) If the employee has been employed for a full pay period or more
preceding his absence, and has worked for the number of days in a normal
work week, but was absent from work for three or more normal working
days during each of the pay periods preceding his absence, then the
``regular weekly rate of wages'' shall be determined by multiplying the
employee's actual wages paid for the total number of normal working days
in the pay period immediately preceding the employee's absence by the
number of days that the employee is expected to work in a normal work
week, and by dividing the product by the number of normal work days in
such pay period for which wages were paid.
(d) If the employee has not been employed for a full pay period
preceding his absence, and has worked for the number of days in a normal
work week, the ``regular weekly rate of wages'' shall be determined by
multiplying the employee's actual wages paid for the total number of
normal working days preceding the employee's absence by the number of
days that the employee is expected to work in a normal work week, and by
dividing the product by the number of normal work days for which wages
were paid.
(e) If the employee has not worked the number of days in a normal
work week, then there is no ``regular weekly rate of wages,'' and the
employee will not be permitted an exclusion under section 105(d) for
amounts attributable to the first 30 calendar days in the period of
absence.
(f) Wages paid by a former employer shall not be used in the
determination of ``regular weekly rate of wages'' as described in this
subparagraph.
(ii) In the case of a wage continuation plan of an employer under
which the benefits are computed as a specified percentage of average
wages, the formula for computing the employee's average wages included
in the plan may be used (in lieu of the formula provided in subdivision
(i) of this subparagraph) for determining the ``regular weekly rate of
wages'' for purposes of section 105(d), if under the plan--
(a) The definition of wages does not include any items which are not
considered ``wages'' as defined in subdivision (iii) of this
subparagraph,
(b) The period for computing average wages is not less than twenty-
eight successive calendar days, does not end earlier than five months
preceding the date on which the period of absence commences, and is one
in which the employee was at work at least 35 percent of the normal
working time, and
(c) The period and formula for computing average wages are applied
uniformly with respect to all employees eligible to receive benefits
under the plan. A plan will not fail to meet the conditions of this
subdivision merely because different portions of the employee's wages
are averaged over different periods for purposes of computing his
average wages, so long as each such period meets the requirements in (b)
and (c) of this subdivision.
(iii) For the purpose of determining ``regular weekly rate of
wages'' under subdivision (i) or (ii) of this subparagraph, whichever is
applicable, an employee's wages shall comprise basic salary, fees,
commissions, tips, gratuities, overtime, and any other type of taxable
compensation which is normally paid for services. However, wages shall
not include any type of compensation which is not normally paid, such as
bonuses and incentive payments. An employee's compensation, for the
purpose of determining his ``regular weekly rate of wages'', will not
include any compensation which is not currently includible in gross
income. For example, an employee's wages for the purpose of this
subdivision shall not include deferred compensation paid by the employer
which is not includible in gross income until received by the employee,
such as employer contributions to a qualified annuity under section
403(a), or employer contributions to an accident or health plan excluded
under section 106.

[[Page 454]]

(iv) The following rules shall be used to convert wages for pay
periods other than weekly pay periods into weekly rates of wage payments
to be used in determining ``regular weekly rate of wages'' as described
in subdivision (i) of this subparagraph.
(a) If wages are paid biweekly, the weekly rate of wage payments
shall be one-half of the biweekly wages paid.
(b) If the employee is paid semi-monthly, the weekly rate of wage
payments shall be the semimonthly wages paid multiplied by 24 and
divided by 52.
(c) If wages are paid monthly, the weekly rate of wage payments
shall be the monthly wages paid multiplied by 12 and divided by 52.
(d) If wages are paid on the basis of a pay period other than a
period described in (a) through (c) of this subdivision, the weekly rate
of wage payments shall be determined by ascertaining the annual rate of
wage payments and dividing by 52.
(e) For the purpose of this subparagraph, if separate portions of an
employee's wages are paid on the basis of different pay periods, the
weekly rate or weekly rates of wage payments of each portion of wages
paid with respect to each pay period shall first be determined under the
rules set forth in (a) through (d) of this subdivision and the average
weekly rate of each portion of wages, determined in accordance with the
rules set forth in subdivision (i) of this subparagraph, shall be
aggregated to determine the employee's ``regular weekly rate of wages''
for purposes of section 105(d).
(v) The provisions of subdivisions (i), (iii) and (iv) of this
subparagraph may be illustrated by the following examples:

Example (1). Employee A is a salesman who is paid a basic salary of
$60 per week and, in addition, is paid commissions on a weekly basis. A
became ill and did not report for work beginning Monday, February 17,
1964. For the four-week period preceding the commencement of the period
of absence, A was paid the following:

------------------------------------------------------------------------
Total
Week of-- Basic Commissions weekly
salary wages
------------------------------------------------------------------------
Jan. 20, 1964...................... $60 $10 $70
Jan. 27, 1964...................... 60 50 110
Feb. 3, 1964....................... 60 30 90
Feb. 10, 1964...................... 60 40 100
------------------------------------
Total 4-week wages............... .......... ........... 370
------------------------------------------------------------------------

A's wages, under the rules set forth in subdivision (iii) of this
subparagraph, consist of basic salary plus commissions. Since the amount
of A's average weekly wages paid for the last four weekly periods
falling within the four pay periods immediately preceding the
commencement of his period of absence from work is $92.50 ($370/4), such
amount is considered as the ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph) for purposes of
section 105(d).
Example (2). Assume, in example (1), that A normally works five days
during each week (Monday through Friday) and that he was also absent
from work for any reason from Monday, February 3, 1964, through
Wednesday, February 5, 1964. Since A was absent from work for three
normal working days during the pay period of February 3, 1964, and was
paid a lesser amount of wages for such pay period than in the
immediately preceding pay period during which he was not absent from
work (week of January 27), the weekly pay period beginning January 27,
1964 is substituted for the weekly pay period beginning February 3, 1964
in the determination of ``regular weekly rate of wages'' (as computed
under subdivision (i) of this subparagraph) for purposes of section
105(d). The ``regular weekly rate of wages'' is calculated to be $97.50,
as follows:

------------------------------------------------------------------------
Week of Total wages
------------------------------------------------------------------------
February 10........................................ $100 ...........
January 27 (substitute for week of Feb. 3)......... 110 ...........
January 27......................................... 110 ...........
January 20......................................... 70 ...........
--------
390/4 = $97.50....................................................
------------------------------------------------------------------------

Example (3). Employee B is a salesman who is paid a basic salary of
$75 and, in addition, is paid commissions for semi-monthly periods
ending on the 15th day and the last day of each month. He was absent
from work on account of a personal injury beginning Monday, February 17,
1964. He was paid the following amounts:

------------------------------------------------------------------------
Total
Pay period Salary Commissions wages
------------------------------------------------------------------------
Feb. 1-15, 1964............................ $75 $60 $135
Jan. 16-31, 1964........................... 75 50 125
------------------------------------------------------------------------

The four weekly periods falling within full pay periods preceding the
commencement of

[[Page 455]]

the period of absence are the weeks beginning February 9, February 2,
January 26, and January 19. B's wages are converted to weekly rates of
wage payments per pay period in accordance with the rule set forth in
subdivision (iv)(b) of this subparagraph as follows:

From February 1, 1964--February 15, 1964, inclusive:
[GRAPHIC] [TIFF OMITTED] TC14NO91.170

From January 16-31, inclusive:
[GRAPHIC] [TIFF OMITTED] TC14NO91.171

$125x24 = $3000.00 (annual rate)

$3000.00
----------------------------------
=$57.69 (weekly rate)
52E

The weekly rates are then used in determining the wages for four weekly
periods falling within the pay periods immediately preceding the
commencement of B's absence. B's ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph) is calculated to be
$60.17, as follows:

Feb. 9-15, inclusive............................. $62.31 ...........
February 2-8, inclusive.......................... 62.31 ...........
January 26-February 1, inclusive (\6/7\x$57.69+\1/ 58.35 ...........
7\x$62.31)......................................
January 19-25, inclusive......................... 57.69 ...........
----------
240.66/4 = $60.17

Example (4). Employee C is paid semi-monthly on the 5th and 20th of
each month and he began working for his present employer at the
beginning of the semi-monthly pay period commencing Tuesday, January 21,
1964. C received total wages of $200 for the pay period of January 21,
1964 through February 5, 1964, inclusive. He was not absent during that
pay period. C became sick and was absent from work beginning February 7,
1964. Since employee C does not have four weekly periods falling within
a full pay period or full pay periods preceding his absence, the average
wages for the last two weekly periods falling within such full pay
period will be C's ``regular weekly rate of wages'' (as computed under
subdivision (i) of this subparagraph) for purposes of section 105(d),
determined to be $92.31, as follows:

$200x24 = $4800 (annual rate)
$4800/52 = $92.31 (weekly rate)

Example (5). Employee D, an office worker, is paid weekly and is
expected to work five days during each week. He has been employed by his
present employer for three weeks, but has been absent from work for
three normal work days in each of the weeks preceding his illness. He
became ill and was absent from work on Monday, February 17, 1964. During
the weekly pay period immediately preceding his absence (week of
February 10) D was paid $48 salary. He was paid for two working days
during such weekly pay period. D's ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph), is calculated to
be $120.00, determined as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.172

Example (6). Employee E is an hourly worker who is paid a salary of
$1.25 per hour. E is paid basic salary on a biweekly basis for the
periods beginning every other Thursday and ending every other Wednesday.
E is also paid monthly for his overtime work and is compensated for such
work at one and one-half times the hourly rate. E worked 16 hours of
overtime for his employer during the month of January. E was injured and
could not report for work on Friday, February 21, 1964. E returned to
work on Monday, March 16, 1964. E was paid as follows for the pay
periods indicated:

----------------------------------------------------------------------------------------------------------------
Hours Salary per hour
Pay period ---------------------------------------------------------------- Total salary
Regular Overtime Regular Overtime
----------------------------------------------------------------------------------------------------------------
Month of January 1964........... .............. 16 .............. $1.875 $30
Jan. 23-Feb. 5, 1964, inclusive. 80 .............. $1.25 .............. 100
Feb. 6-19, 1964, inclusive...... 80 .............. 1.25 .............. 100
----------------------------------------------------------------------------------------------------------------

[[Page 456]]

Under the rule set forth in subdivision (iv)(e) of this subparagraph,
the weekly rates of payment of salary and overtime must be determined
separately. Since basic salary is paid biweekly, the weekly rate of
payment is determined to be one-half of $100.00, or $50.00. The full pay
period immediately preceding the commencement of E's absence for
overtime compensation ended on January 31, 1964. E's overtime earnings
are converted to a weekly rate for such period, as follows:
$30.00 (overtime pay)x12 = $360.00
(annual rate)
$360.00/52 = $6.93 (weekly rate)
The average wages for the last four weekly periods falling within pay
periods immediately preceding the commencement of E's absence with
respect to basic salary (weeks of February 13, 6, January 30, and 23) is
$50.00. The average wages for the last four weekly periods falling
within the pay period immediately preceding the commencement of E's
absence with respect to overtime compensation (weeks of January 25, 18,
11, and 4) is $6.93. Accordingly, E's ``regular weekly rate of wages''
(as computed under subdivision (i) of this subparagraph) for the purpose
of section 105(d) is $56.93.

(6)(i) Amounts paid under a wage continuation plan must be converted
to a weekly rate in order to determine the percentage of benefits paid
in relation to the employee's ``regular weekly rate of wages'', since
such percentage is used in determining the waiting period, if any, after
which an exclusion is allowable under section 105(d). In order to
calculate the weekly rate at which benefits are being paid, reference is
made to the particular wage continuation plan. If, in the usual
operation of the plan, benefits are paid for the same periods as regular
wages, then the pay period of such benefits shall be the period for
which a payment of wages is ordinarily made to the employee by the
employer. If plan benefits are ordinarily paid for different periods
than regular wages, then the pay period of such benefits shall be the
period for which payment of such benefits is ordinarily made.
(ii) The weekly rate at which the benefits are paid under a wage
continuation plan shall be determined in accordance with the following
rules:
(a) If benefits are paid on the basis of a weekly pay period, the
weekly rate at which such benefits are paid shall be the weekly amount
of such benefits.
(b) If benefits are paid on the basis of a biweekly pay period, the
weekly rate at which such benefits are paid shall be one-half of the
biweekly rate.
(c) If benefits are paid on the basis of a semimonthly pay period,
the weekly rate at which such benefits are paid shall be the semimonthly
rate multiplied by 24 and divided by 52.
(d) If benefits are paid on the basis of a monthly pay period, the
weekly rate at which such benefits are paid shall be the monthly rate
multiplied by 12 and divided by 52.
(e) If benefits are paid on the basis of a period other than a
period described in (a) through (d) of this subdivision the weekly rate
at which such benefits are paid shall be determined by ascertaining the
annual rate at which such benefits are paid and dividing such annual
rate by 52.
(iii) The principles of subdivisions (i) and (ii) of this
subparagraph may be illustrated by the following example:

Example. A's employer maintains a noncontributory plan which
provides for a monthly benefit of $400 during periods of absence from
work due to personal injury or sickness. A, a salesman, receives regular
salary of $520 per calendar month plus commissions, depending upon the
amount of sales made by A during the month. During the month of January
1964, A was paid commissions of $180. A received a total benefit of $200
for an absence of two weeks because of illness occurring in February
1964. He was not hospitalized. Since benefits under the salary
continuation plan are paid for the same period as regular wages, the pay
period of the plan is monthly. A's ``regular weekly rate of wages'',
determined in accordance with the rules set forth in subparagraph (5)(i)
of this paragraph is $161.54. ($700x12)/52.

For purposes of determining the percentage of benefits paid in relation
to A's ``regular weekly rate of wages'', the weekly rate of the benefits
are calculated to be $92.31, as follows:

$400 (monthly rate)x12 = $4,800 (annual rate)
$4,800/52 = $92.31 (weekly rate)
Since $92.31 does not exceed 75 percent of A's ``regular weekly rate of
wages'', A is entitled to an exclusion under section 105(d) for the
second week of absence, subject to the other limitations provided in
this section.

(iv) For the purpose of determining whether or not the rate of
benefits paid under a wage continuation plan for a period of absence
exceeds 75 percent of the employee's ``regular weekly rate of

[[Page 457]]

wages'' (as determined under subparagraph (5) of this paragraph), it is
necessary to ascertain the average percentage of benefits paid in
relation to the employee's ``regular weekly rate of wages'' for the
first 30 calendar days in the period of absence. Such percentage is
derived from a fraction, the numerator of which is the sum of benefits
paid (attributable to employer contributions) for the period of absence
occurring within the first 30 calendar days, and the denominator of
which is the collective sum of the employee's ``regular weekly rate of
wages'' during such period. This rule may be illustrated by the
following examples:

Example (1). Employee A is paid a semi-monthly basic salary of $150
plus commissions. He normally works five days during each week (Monday
through Friday). During the month of January 1964, A received wages of
$150 plus commissions of $66.67 for each of the semimonthly pay periods.
A became ill on Monday, February 3, 1964, and as a result was absent
from work until Monday, February 17, 1964, but was not hospitalized.
Under the noncontributory wage continuation plan of A's employer, A
received no benefits for the first three working days' absence (Monday
through Wednesday) and was paid benefits at the rate of $100 a week
thereafter. A's ``regular weekly rate of wages,'' determined under the
rules set forth in subparagraph (5) of this paragraph, is $100. A is
considered to have received average benefits at a rate of 70 percent of
his ``regular weekly rate of wages'', computed as follows:

------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Regular
Benefits weekly
Week of absence paid rate of
wages
------------------------------------------------------------------------
1-Feb. 3........................................ $40 $100
2-Feb. 10....................................... 100 100
-----------------------
Total......................................... 140 200
------------------------------------------------------------------------

Average percentage of benefits paid-- 140/200 = 70%. Accordingly, A may
exclude amounts attributable to the second week of absence, subject to
the other limitations of section 105(d).
Example (2). Assume, in example (1), that A did not return to work
until Thursday, February 20, 1964. A is considered to have received
average benefits at the rate of 76.92 percent of his ``regular weekly
rate of wages'', computed as follows:

------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Regular
Benefits weekly
Week of absence paid rate of
wages
------------------------------------------------------------------------
1-Feb. 3........................................ $40 $100
2-Feb. 10....................................... 100 100
2\3/5\--Feb. 17................................. \1\ 60 \1\ 60
-----------------------
Total......................................... 200 260
------------------------------------------------------------------------
\1\ Three-fifths of 100.

Average percentage of benefits paid-- 200/260 = 76.92%. Accordingly, A
would not be permitted any exclusion under section 105(d).

(v) If with respect to any pay period or portion thereof the
employee receives amounts under two or more wage continuation plans
(whether such plans are maintained by or for the same employers or by
different employers), the weekly rate for purposes of section 105(d)
shall be the sum of the weekly rates received under all plans. This rule
may be illustrated by the following example:

Example. An employee who is absent because of personal injuries or
sickness receives $100 biweekly under wage continuation plan A
maintained by his employer. He contributes one-half of the premiums for
maintenance of the plan. Under wage continuation plan B maintained by
his employer the employee receives $400 monthly. Plan B is
noncontributory. The weekly rate at which benefits are paid for the
purpose of section 105(d) is computed as follows:

$100
Plan A-- ---------- = $50.00 (weekly rate)
2 25.00 (less amount
attributable
to employee
con-
tributions (\1/
2\))
........... ---------- ...............
........... 25.00 (weekly rate of
Plan A)
$400x12 ........... ...............
Plan B-- ---------- = 92.31 (weekly rate of
Plan B)
52 $117.31 (combined
weekly rate at
which benefits
are paid)
------------------------------
------------------------------------------------------------------------

The $25 attributable to contributions made by the employee under Plan A
would be subject to section 104(a)(3).

(f) Amount of exclusion for periods of absence commencing after
December 31, 1963--(1) In general. Amounts received

[[Page 458]]

under a wage continuation plan attributable to periods of absence
commencing after December 31, 1963, and which are not excludable from
gross income as being attributable to contributions of the employee (see
Sec. 1.105-1) are excludable from gross income of the employee to the
extent that such amounts do not exceed--
(i) A weekly rate of $75, during the first 30 calendar days in the
period of absence; and
(ii) A weekly rate of $100, after the first 30 calendar days in the
period of absence.

For example, an employee who normally works five days during each week
is absent from work for two days, is hospitalized during his absence,
and receives $75 under his employer's wage continuation plan, which
amount is at a rate of 75 percent of his ``regular weekly rate of
wages''. The employee cannot exclude the entire $75 under section
105(d), if the weekly rate of such benefits exceeds $75.
(2) Daily exclusion. An employee receiving payments under a wage
continuation plan must, in order to determine the amount of the
exclusion under section 105(d), compute the daily rate of the benefits.
Such daily rate is determined, for amounts attributable to the first 30
calendar days in the period of absence, by dividing the weekly rate at
which benefits are paid (as determined under paragraph (e)(6)(ii) of
this section), or the maximum weekly rate at which wage continuation
payments are excludable ($75), whichever is lower, by the number of work
days in a normal work week. In the case of amounts attributable to days
in a period of absence after the first 30 calendar days, the daily rate
for such period is determined by dividing the weekly rate at which
benefits are paid (as determined under paragraph (e)(6)(ii) of this
section), or the maximum weekly rate at which wage continuation payments
are excludable ($100), whichever is lower, by the number of work days in
a normal work week. The daily rate or daily rates of exclusion are then
multiplied by the number of normal work days in the period of absence
for which an exclusion is allowable in order to determine the total
allowable exclusion. These rules may be illustrated by the following
examples:

Example (1). Employee A is a salesman receiving salary and
commissions on a weekly basis. His employer maintains a noncontributory
wage continuation plan which provides for the continuation of A's basic
salary of $80 per week during periods of absence. A was absent from work
on account of sickness from Monday, February 3, 1964, through Sunday,
March 15, 1964, but was not hospitalized. His normal work week is from
Monday through Friday. The weekly amount of benefits paid to A ($80)
does not exceed 75 percent of his ``regular weekly rate of wages'' as
defined in paragraph (e)(5) of this section. Under section 105(d), the
daily rate of exclusion for amounts attributable to the first 30
calendar days in the period of absence, excluding the first 7 days
thereof (Monday, February 10, 1964, through Tuesday, March 3, 1964,
inclusive) is limited to $15 ($75, maximum weekly rate of exclusion
divided by 5 (number of normal work days in week)). The daily rate of
exclusion for amounts attributable to the period of absence in excess of
30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15,
1964, inclusive) is limited to $16 ($80, weekly rate of benefits divided
by 5). Thus, the total exclusion permitted to employee A by section
105(d) is $383.00 ($15 x 17 work days ($255) + $16 x 8 work days
($128)).
Example (2). Assume the facts in example (1) except that A is paid
benefits at the rate of $500 a month during periods of absence. The
weekly rate of the benefits computed under the rules stated in paragraph
(e)(6)(ii) of this section is $115.38, which amount does not exceed 75
percent of his ``regular weekly rate of wages'' as defined in paragraph
(e)(5) of this section. Under section 105(d), the daily rate of
exclusion for amounts attributable to the first 30 calendar days in the
period of absence, excluding the first 7 days thereof (Monday, February
10, 1964, through Tuesday, March 3, 1964, inclusive) is limited to $15
($75, maximum weekly rate of exclusion divided by 5). The daily rate of
exclusion for amounts attributable to the period of absence in excess of
30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15,
1964, inclusive) is limited to $20 ($100, maximum weekly rate of
exclusion divided by 5). Thus, the total exclusion permitted to employee
A by section 105(d) is $415.00 ($15 x 17 work days ($255) + $20 x 8 work
days ($160)).
Example (3). Employee B, an office worker works five days during
each week (Monday through Friday) and receives a salary of $85 per week.
His employer maintains a noncontributory wage continuation plan which
provides for no benefits during the first three days of absence, the
continuation of full salary for one week thereafter and benefits at

[[Page 459]]

the rate of $65 per week thereafter. B was absent from work on account
of sickness from Monday, March 16, 1964, through Tuesday, March 31,
1964, and was hospitalized from Wednesday, March 18, through Tuesday,
March 24. B received total benefits of $137 for the period of absence,
which does not exceed 75 percent of his ``regular weekly rate of wages''
as determined under paragraph (e)(5) of this section. B is permitted an
exclusion under section 105(d) of $127 calculated as follows:

----------------------------------------------------------------------------------------------------------------
Maximum weekly Days of
Period of absence Weekly rate of rate of Daily rate of absence in Maximum
benefits exclusion exclusion period exclusion
----------------------------------------------------------------------------------------------------------------
Mar. 16-18...................... 0 $75 0 3 0
Mar. 19-25...................... $85 75 $15 5 $75
Mar. 26-31...................... 65 75 13 4 52
-------------------------------------------------------------------------------
Total exclusion............... .............. .............. .............. .............. $127
----------------------------------------------------------------------------------------------------------------

(g) Definitions. The term ``personal injury'' as used in this
section, means an externally caused sudden hurt or damage to the body
brought about by an identifiable event. The term ``sickness'' as used in
this section, means mental illnesses and all bodily infirmities and
disorders other than ``personal injuries''. Diseases, whether resulting
from the occupation or otherwise, are not considered personal injuries,
but they are treated as a sickness.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6770, 29 FR
15366, Nov. 17, 1964; T.D. 7352, 40 FR 16666, Apr. 14, 1975]