Guest Article

(From the May 26, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

One-Time Election of Retiree Health Benefits or Increased Pay is Not Constructive Receipt

The Internal Revenue Service ruled that an employee's one-time irrevocable election to waive future retiree medical benefits in favor of increased pay did not cause the employee to be in constructive receipt of income under Internal Revenue Code § 451. IRS Private Letter Ruling 200914018 (Released 4/3/2009).

In the Private Letter Ruling, the taxpayer employer advised the Internal Revenue Service (IRS) that it provides retiree health insurance benefits to its employees, but seeks to provide the employees with a one-time irrevocable election to waive the retiree health insurance in exchange for a higher rate of pay. It will provide current employees with an election that must be completed by a fixed date, and will provide new employees with an election that must be completed within 15 days after starting employment. Employees who fail to make an election will receive the retiree health benefits, and will not be allowed to waive that benefit at any later date. Employees who elect the increased pay will have their rate of pay increased prospectively -- no additional salary or taxable compensation will be paid for payroll periods that were already paid.

The taxpayer employer asked the IRS whether an employee would be in constructive receipt of income due to the one-time election.

Treasury Regulation § 1.451-2(a) states that income is constructively received by a taxpayer in the taxable year during which it is credited to his account, set apart for him or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intent to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

The IRS ruled that, in the situation described, an employee would not be in constructive receipt as a result of the one-time irrevocable election to waive retiree health benefits in exchange for a higher rate of future pay.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2009, Deloitte.