duration." This is the same test of disability as applies under the Social Security Act. Moreover, the provision is not to apply if the employer, or an organization to which deductible charitable contributions can be made, is the beneficiary of the group-term insurance on the employee's life. For income tax purposes, no charitable contribution deduction may be taken in those cases where a charity is named as the beneficiary. In addition, this provision is not to apply with respect to groupterm life insurance protection provided under a qualified employee's pension, profit-sharing or stock bonus plan. In these situations, as already indicated, the amount of the premium for the group-term insurance is already fully includible in the covered individual's gross income, and that result is not modified by this provision. Where an amount is required to be included in an employee's gross income under this provision, the employer is required to treat the includible amount as wages and withhold taxes with respect to it. Thus, if employees X and Y in example 1 above, are paid on a monthly basis by their employer, X will be treated as if he received an additional $1.75 of wages each month (21.10-12) and his employer will withhold approximately 25 cents ($1.75 X 14 percent (proposed withholding rate for 1965)) from his wages each month. Employee Y will be treated as if he received an additional $9.05 of wages each month and his employer will withhold approximately $1.27 from his wages each inonth. For income tax withholding purposes, each employer is to determine whether any amount is includible in his employee's gross income (and subject to withholding) as if he were the only employer. For example, if an employee has two employers each of whom provides him with $20,000 of group-term life insurance protection, then neither employer treats any amount as includible in that employee's income. (Of course, the employee must include the cost of $10,000 of group-term life insurance protection in his gross income when he files his tax return for the year, and pay tax on the included amount at that time.) There would be no withholding with respect to social security taxes, nor would the amount includible in gross income under this provision constitute "wages" for purposes of the unemployment tax (IRC., secs. 3121 (b)(2), 3306(b)(2)). If an employee is provided with group-term life insurance protection of less than $30,000 for part of a year and more than $30,000 for the remainder of the year, the cost of the protection in excess of $30,000 for the portion of the year it is provided must be included in his gross income. For example, if an employee is provided $25,000 of groupterm life insurance for the first 6 months of his taxable year and $40,000 of such insurance for the remaining 6 months, the cost of $10,000 of the group-term insurance for the second 6-month period is includible in his gross income. However, if the employee contributes toward the cost of his insurance protection, the total amount of his contributions, both with respect to the period during which his protection was less than $30,000 as well as during the period it was greater, serve to reduce the amount includible in his gross income. This is illustrated by the following example: Example 3.-Employee Y is provided with $25,000 of group-term life insurance protection for the first 6 months of his taxable year and $40,000 of such protection for the remaining 6 months. His employer requires Y to pay $1 for each thousand dollars of protection for 1 year. The amount includible in Y's gross income is determined by reference to the uniform premium table as follows: Total group-term life insurance protection. Group-term life insurance protection in excess of $30,000 Cost of $10,000 of group-term life insurance protection for Y for 1⁄2 year (10X $10. 87 × 1⁄2). Less Y's contribution (40X1X1⁄2) + (25×1×1⁄2). Total... $40, 000 30, 000 10, 000 54. 35 32.50 21.85 Thus, for the taxable year Y must include $21.85 in his gross income. A special deduction (from adjusted gross income) is provided under the provision for those employees whose own contribution toward the purchase price of group-term life insurance protection in excess of $30,000 exceeds the cost of such insurance as determined by the uniform premium table. (In measuring the deduction, the average premium cost method may not be used.) The purpose of this is to enable an employee to deduct the amount he has contributed to purchase group-term life insurance protection for other employees covered under the group. The operation of this special deduction is illustrated by the following example: Example 4-Employee X (age 28) and employee Y (age 50) are each provided with $40,000 of group-term life insurance protection by their employer. They are required by their employer to contribute $2.50 for each thousand dollars of protection. The amount deductible (if any) is determined as follows: Total group-term life insurance protection_ Group-term life insurance protection in excess of $30,000__. Amount paid by X for protection in excess of $30,090 ($2.50× 10).. Total. 840. 000 30.000 10,000 25. 00 21. 10 3.90 Thus, the amount deductible by employee X is $3.90; Y, on the other hand, would have no deduction under the assumed facts because his contribution of $2.50 for each thousand dollars of group-term protection in excess of $30,000 is less than the uniform premium cost of such protection ($10.87) for employees in his age bracket. (As a matter of fact, Y must include $8.70 in his income, determined by subtracting Y's contribution of $100 ($2.50×40) from $108.70 (the cost of insurance protection in excess of $30,000 provided by the employer).) Example 5.-Assume the same facts as in example 4 except that the employer provides the first $30,000 of group-term life insurance without cost to all the employees. For each thousand dollars of protection in excess of $30,000, each employee is required to contribute $2.50. The amount deductible (if any) is determined as follows: Total group-term life insurance protection_. Less $30,000 exclusion.......... Group-term life insurance protection in excess of $30,000__. Amount paid by X for protection in excess of $30,000 ($2.50× 10) - - - - Less cost on uniform premium table of protection in excess of $30,000 ($2.11X10). Total.... $40, 000 30, 000 10, 000 25.00 21. 10 3.90 Thus, the amount deductible by employee X is $3.90; Y, on the other hand, would have no deduction, because his contribution of $2.50 for each thousand dollars of group-term protection in excess of $30,000 is less than the uniform premium table cost of such insurance ($10.87). (As a matter of fact, Y must include $83.70 in his income, determined by subtracting Y's contribution of $25 ($2.50X10) from $108.70 (the cost of insurance protection in excess of $30,000 provided by the employer).) For purposes only of measuring the amount of a deduction by an employee under this provision, the age 63 limitation for employees who are 64 or over does not apply. This means that for an employee age 64 or over to deduct any amount contributed by him toward the purchase price of group-term insurance protection in excess of $30,000, his contribution must exceed the uniform premium cost for an individual in his actual age bracket, not the age 60-64 bracket. Life insurance salesmen are to be treated as employees for purposes of the new provisions relating to group-term life insurance protection. Estimated impact: The Treasury Department has indicated that this provision will affect less than 1 percent of the 43 million employees covered by group-term life insurance. The provision is estimated to increase revenues by $5 million in a full year of operation. Effective date: These provisions are to apply with respect to groupterm life insurance protection provided after December 31, 1963. SECTION 204. REIMBURSEMENT OF MEDICAL EXPENSES IN EXCESS OF SUCH EXPENSES Generally, under present law, amounts received from accident or health insurance for medical expenses for personal injuries or sickness are not includible in gross income. In addition, accident and health insurance premium payments may be claimed as a medical deduction if, when combined with other unreimbursed medical expenses, they exceeded 3 percent of adjusted gross income. Cases have arisen where a taxpayer has received, through duplicate payments under more than one accident or health insurance policy, payments which have exceeded his medical expenses with respect to a given injury or sickness. These cases occur when the individual himself carries two policies or when the individual carries one policy and his employer also provides for the payment of his medical expenses either through an insurance policy or through self-insurance. The bill would amend present law by providing that in such cases where the payments received from accident or health insurance for medical expenses for any one given injury or sickness exceed the total amount of medical expenses incurred with respect to that injury or sickness such excess amount is to be treated as income. This amendment would apply to accident and health insurance payments received in taxable years beginning after December 31, 1963, and is expected to result in a negligible increase in revenue. 42 SECTION 205. AMOUNTS RECEIVED UNDER WAGE CONTINUATION PLANS Present law provides that wage continuation payments attributable to absence from work because of personal injury or sickness are not includible in gross income to the extent such amounts do not exceed a weekly rate of $100. However, such exclusion is available only after the first 7 days of absence unless the employee is hospitalized because of the sickness for at least 1 day during his absence, or unless the taxpayer was injured in which case no waiting period is required. The bill would amend present law by providing that wage continuation payments would not be excludable to the extent such payments are attributable to the first 30 days of absence because of personal injury (permanent or otherwise) or sickness regardless of whether or not the employee is hospitalized during that 30-day period. Present law treatment of taxpayers receiving permanent disability pensions before the normal retirement age would be continued. Present law would also be continued with respect to the employer withholding and reporting requirements. The amendment would be applicable to wage continuation payments attributable to periods of absence commencing after December 31, 1963, and is estimated to result in an increase in revenues of $110 million a year when fully effective. 43 |