Rev. Rul. 54-440

Advice has been requested whether withholding of income tax by employers is required with respect to amounts paid employees in 1954 that are excludable from the employee's gross income under section 105(d) of the Internal Revenue Code of 1954. Section 105 provides for the exclusion from gross income of certain amounts which are received by an employee under an accident and health plan for personal injuries or sickness and which are attributable to contributions by the employer which were not includible in the gross income of the employee, or which are paid by the employer. Subsection (d) of section 105 relates to wage continuation plans and provides in certain cases for the exclusion from gross income of amounts which constitute wages or payments in lieu of wages for a perido during which the employee is absent from work on account of personal injuries or sickness.

The Internal Revenue Service is publishing a notice of proposed rulemaking, pursuant to the Administrative Procedure Act, which sets forth amendments proposed to be prescribed by the Commissioner of Internal Revenue to Treasury Department Regulations 120, relating to the rules for withholding tax on payments to employees. Under the notice of proposed rulemaking, 30 days are provided for the submission to the Commissioner of Internal Revenue of any data, views, or arguments pertaining to the rules contained in the proposed amendments to the regulations. After the consideration of such data, views, or arguments as may be received, the Commissioner will prescribe regulations with the approval of the Secretary.

In the meantime, however, by reason of the importance of the matter to taxpayers generally, the rules provided in the proposed regulations issued under the notice of rulemaking may be followed by employers. The rules so provided are, of course, subject to modification based upon the further consideration which will be given to the subject as a result of any data, views, or arguments received during the period of 30 days following the publication of the proposed regulations. The rules contained in the proposed regulations issued under the notice of rulemaking will be superseded by the rules contained in the regulations prescribed by the Commissioner with the approval of the Secretary. Such regulations, however, will not be retroactive in their application and employers who, in accordance with the proposed regulations, do not withhold tax for the period prior to the application of the regulations prescribed with the approval of the Secretary will not be held liable by the Internal Revenue Service for failure to withhold should a different rule be prescribed by the final regulations.

The rules contained in the notice of rulemaking, which may be given effect until superseded, are as follows:

Withholding is not required upon amounts which are excludable from the gross income of the employee by reason of section 105(d) of the Internal Revenue Code of 1954, if the records maintained by the employer in accordance with the provisions of section 406.607(a) of Regulations 120 (26 CFR, pt. 406)-

(1) separately show the amounts of such payments and distinguish such amounts from all other payments, and

(2) establish the facts necessary to show that the employee is entitled to the exclusion provided by section 105(d), either by means of a written statement from the employee as to the injury, illness, or hospitalization, or by any other information which the employer believes to be accurate and which he is willing to accept for purposes of payments under the wage continuation plan.

For the purpose of section 406.501 of Regulations 120, relating to the requirement of receipts for employees, amounts excludable from gross income under the provisions of section 105(d) shall be included in the total wages required to be shown on Form W-2, Withholding Statement. The amount of any such wages on which the employer, in reliance on section 105(d), does not withhold must be properly identified. The amount so identified shall be shown in the lower right-hand box on Form W-2 in such manner that it may be read on each copy of the form.

If, under an accident or health insurance plan, payments for a period of absence from work on account of injury or sickness are made to an employee by a person who is not the employer for whom services are performed but who is regarded as an employer under the provisions of section 406.205(c), and such payments are attributable to contributions by the employer which were not includible in the gross income of the employee, the rules provided in the preceding paragraphs shall apply. However, Form W-2 shall not be required under the preceding paragraph in any such case in which, by reason of section 105(d), no amount was withheld on any of the payments. For example, if under the insurance plan the weekly rate of payment does not exceed $100 and no payment is made for absence on account of illness, unless there is 1 day hospitalization, so that all of the payments under the insurance plan are excludable under section 105(d), no withholding need be made and no Form W-2 need be filed.

No adjustment is required with respect to income tax withheld on amounts paid to employees during the calendar year 1954 which are excludable from gross income under the provisions of section 105(d). However, if the employer has adequate records and desires to make such adjustments, he may do so.