N.Y. Comp. Codes R. & Regs. tit. 2, Appendices, app 11-A
Gentlemen:
You have requested rulings concerning the Federal tax consequences of pre-retirement death benefits payable to the beneficiaries of deceased members under the laws pertaining to the New York State Employees' Retirement System and the New York State Policemen's and Firemen's Retirement System (sometimes hereinafter referred to as the System).
Information available to this office discloses that the New York State. Employees' Retirement System and the New York State Policemen's and Firemen's Retirement System are held to be qualified under section 401(a) of the Internal Revenue Code.
The death benefits in question are authorized by the provisions of section 60, 60a 360 and 360a of the Retirement and Social Security Law and are wholly payable from employer contributions. The death benefits payable pursuant to these sections of the Law are based on such variables as the date of original service, length of service, salary and age, and may be summarized as the larger of
(a) three times salary to a maximum of $20,000, or
(b) a percentum of final salary for each year of service, not to exceed 36, to a maximum of 3 years' salary, or
(c) if the deceased was eligible to retire, the initial value of the pension reserve (modified or actual) that would have been payable had the member retired on the date of his death.
Member's contributions, if any, with interest are refunded to a beneficiary as an incident to the death of a member but not as a death benefit.
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State of New York Department of Audit and Control
The New York State Public Employees Group Life Insurance Plan was established on January 1, 1970, and provides group term life insurance to a maximum of $50,000 of the ordinary death benefit. Such insurance coverage is wholly paid for by the employer.
Your request is based on the following assumed facts illustrated by examples (A), (B) and (C) which utilize age 55 as a time for eligibility for retirement and the above death benefit formulae (b) and (c). In samples (B) and (C), the first $50,000 of the death benefit is group term life insurance.
Membership Status as of December 31, 1969
| Date of birth | 1/1/15 |
| Date of membership | 12/31/33 |
| Member's service | 36 yrs. |
| Salary | $20,000.00 |
Based on the above data upon death, the beneficiary would be entitled to:
(A) Death as of December 31, 1969
| Decedent's contributions | $ 8,000.00 | |
| Interest | 9,510.00 | $17,510.00 |
| Death benefit | 60,000.00 | |
| $77,510.00 |
Computation of Death Benefit
Three years' salary - decedent had not attained age 55.
(B) Death as of January 1, 1970
| Decedent's contributions | $8,000.00 | |
| Interest | 9,512.00 | $17,512.00 |
| Death benefit | 90,852.00 | |
| $108,364.00 |
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State of New York
Department of Audit and Control
Computation of Death Benefit | |
| Pension reserve - member attained retirement age. | |
| Service prior to 4/1/60 | |
| $20,000.00 x 26 yrs. 3 mos./120 = | $ 4,375.00 |
| Service after 4/1/60 | |
| $20,000.00 x 9 yrs. 9 mos./60 = | 3,250.00 |
| Annual pension | $ 7,625.00 |
| x annuity value age 55 | 11.915 |
| Pension reserve | $ 90,852.00 |
(C) Death as of December 31, 1970
| Decedent's contributions | $ 8,000.00 | |
| Interest | 10,210.00 | $ 18,210.00 |
| Death benefit | 92,432.00 | |
| $110,642.00 | ||
Computation of Death Benefit | ||
| Pension reserve - member attained retirement age. | ||
| Service before 4/1/60 | ||
| $20,000.00 x 26 yrs. 3 mos./120 = | $ 4,375.00 | |
| Service after 4/1/60 | ||
| $20,000.00 x 10 yrs. 9 mos./60 = | 3,583.00 | |
| Annual pension | $ 7,958.00 | |
| x annuity value age 56 | 11.615 | |
| Pension reserve | $ 92,432.00 | |
Based on the foregoing, you request a ruling as to the income tax liability under the data given in examples B and C. (You mention that example A was presented merely to show the increase in benefits effected by points in time after December 31, 1969.)
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State of New York
Department of Audit and Control
You also request confirmation that the term "plan years" as used in IRC 402(a)(5) means a fiscal year (i.e., our fiscal year April 1 to March 31) and that any limitation on capital gains would be for benefits accrued after March 31, 1970; also that Bryant v. U.S. (DC Md, CCH 1969 USTC S. 12, 636) excludes from estate tax any interest on member contributions.
In addition, by letter dated July 6, 1970, you request rulings with respect to the New York State Public Employees Group Life Insurance Plan as follows:
1. The group life insurance benefit, not to exceed $50,000, is exempt from Federal income tax pursuant to section 101(a)(1) of the Code;
2. The group life insurance benefit is subject to Federal estate tax pursuant to section 2042 of the Code;
3. Because the maximum insurance coverage is limited to $50,000, and because the contract is not purchased through either of the qualified pension plans administered by the State Comptroller, the cost of the insurance coverage is not taxable to the employee as imputed income under either section 72 or 79 of the Code.
With regard to the rulings requested in connection with the death benefits described in examples B and C of your first ruling request, we are assuming for the purpose of this ruling that any such death benefits will be distributed of those entitled thereto as a total distribution payable within the intendment of section 402(a)(2) of the Code.
Section 402(a)(2) of the Code provides, in the case of an employees' trust described in section 401(a) which is exempt from tax under section 501(a), that if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employees death or other separation from the service, the amount of such distribution, to the extent exceeding the amounts, if any, contributed by the employee (determined by applying section 72(f)), shall be treated as a gain from the sale or exchange of a capital asset held for more than six months. However, section 402(a)(5), which was added to the Code by section 515 of the Tax Reform Act of 1969, P.L. 91-172, 91st Cong., 1st Sess., provides that such treatment
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State of New York
Department of Audit and Control
shall apply to a distribution paid after December 31, 1969, only to the extent that it does not exceed the sum of (A) the benefits accrued by the employee on behalf of whom it is paid during plan years beginning before January 1, 1970, and (B) the portion of benefits accrued by such employee during plan years beginning after December 31, 1969, which the distributee establishes does not consist of the employee's allowable share of employer contributions to the trust by which such distribution is made. Any such excess is taxable as provided in Code section 72(n) as amended by section 515 of the Tax Reform Act of 1969, Public Law 91-172, 91st Cong., 1st Sess.
With respect to benefits paid on account of the death of a member, section 101(b) provides in part that except for "total distributions payable," which are paid within one taxable year of the distributee under a qualified plan, the $5,000 death benefit exclusion does not apply to amounts with respect to which the deceased employee possessed immediately before his death, a nonforfeitable right to receive the amounts while living; nor does the exclusion apply to amounts received as an annuity under a joint and survivor annuity obligation where the employee was the primary annuitant and the annuity starting date occurred before the death of the employee.
While the death benefit exclusion under section 101(b) ordinarily does not apply to amounts to which the deceased employee had a nonforfeitable right to receive while living, it will nevertheless, apply to "total distributions payable" under qualified plans even though the deceased employee had a nonforfeitable right to receive the amounts while living. Furthermore, any amount found to be excludable as a death benefit shall, for purposes of section 72, be treated as additional consideration paid by the employee.
Section 79(a) of the Internal Revenue Code of 1954 provides the general rule that there shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of the cost of $50,000 of such insurance, and the amount (if any) paid by the employee toward the purchase of such insurance.
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State of New York
Department of Audit and Control
Section 1.79 -1(b)(1)(i) of the Income Tax Regulations provides, in general, that group-term life insurance is term life insurance protection provided under a master policy, or group of individual policies, which policy or policies, constitute life insurance contracts for purposes of section 101(a) of the Code and form a part of a plan of group insurance as defined in section 1.79 -1(b)(1)(iii) of the regulations. However, section 79 does not apply to any amount of life insurance protection provided for an employee by an employer which is in excess of the maximum amount of such protection which could, under the law of the applicable jurisdiction, be provided by such employer for such employee under a master policy providing only group-term life insurance protection.
Section 1.79 -1(b)(1)(iii)(b) of the regulations provides, in part, that to constitute a plan of group insurance, the plan must make term life insurance available to a group of lives. Such group must include all of the employees of the employer, or, subject to certain exceptions not pertinent here, a class or classes of such employees the members of which are determined on the basis of factors which preclude individual selection. Examples of such factors are membership in a union whose members are employed by the employer, marital status, and age.
In addition, section 1.79 -1(b)(1)(iii)(c) of the regulations provides, in part, that to constitute a plan of group insurance, the amounts of insurance protection provided under the plan must be based upon some formula which precludes individual selection of such amounts. Thus, for example, the amounts of insurance on the lives of those individuals eligible for insurance under the plan must be based on a factor such as salary, years of service or position, or a combination of such factors.
Therefore, with regard to ruling requests number 1 and 3 of your letter dated July 6, 1970, we have concluded, based upon the information presented and provided the $50,000 of group-term life insurance coverage is not in excess of the maximum coverage permitted by section 1.79 -1(b)(1)(i) of the regulations, that the cost of the life insurance provided an employee under the New York State Public Employee Group Life Insurance Plan will be excludable from the employee's gross income for Federal income tax purposes under section 79 of the Code. Moreover, the proceeds of such insurance paid by reason of the death of such employee will be excludable from the gross income of the recipient pursuant to the provisions of section 101(a)(1) of the Code. It is further concluded that the insurance coverage is not taxable to the employee as imputed income under section 72 of the Code.
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State of New York
Department of Audit and Control
Furthermore, with respect to examples B and C in your letter of March 9, 1970, we have concluded that, if the amounts distributed in such cases in excess of the amount excludable under Code section 101(a)(1) as proceeds of life insurance under the Group Life Insurance Plan, are distributed to the distributee in a lump-sum, within one taxable year of the distributee, on account of the employee's death, then the amount of such distribution to the extent exceeding (1) the amounts contributed by the employee into the System, including the amount, if any, considered to be contributed by the employee under Code section 72(f)(2), plus (2) the amount excludable as a death benefit under Code section 101(b), shall be treated as a long-term capital gain under Code section 402(a)(2), but only to the extent permitted by Code section 402(a)(5), if applicable.
Since the regulations under section 402(a)(5), which was added to the Code by the Tax Reform Act of 1969 have not yet been promulgated, we are unable to answer your question concerning the proration under such section of the death benefit exclusion of section 101(b). However, if the regulations, when issued, do not provide a satisfactory answer to the problem, we will be glad at that time to give the matter further consideration if you so desire.
The term "plan years" as used in Code section 402(a)(5) is interpreted to mean a taxable year of the trust which is a part of the plan. Accordingly, we conclude in this case that "plan years" would include a fiscal year where the plan and trust so provide.
In connection with your questions concerning the Federal estate tax consequences of the payment that consists of the decedent's contributions, interest accrued on these contributions, and a death benefit made to a person nominated by the decedent or his estate, it should be pointed out that the Internal Revenue Service does not issue rulings involving the prospective application of the Federal estate tax. See section 3.02 of Revenue Procedure 69-1, C.B. 1969-1, 381. Therefore, only general information can be furnished.
Section 2042 of the Code provides for the inclusion in a decedent's gross estate of the proceeds of insurance on the decedent's life (a) receivable by or for the benefit of the estate and (b) receivable by other beneficiaries. It requires inclusion of the proceeds of insurance on the decedent's life not receivable by or for the benefit of the estate if the decedent possessed at the date of his death any of the incidents of ownership in the policy, exercisable either alone or in
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State of New York
Department of Audit and Control
conjunction with any other person. Section 20.2042 -1 (c)(2) of the state Tax Regulations provides that generally speaking the term "incidents of ownership" has reference to the right of the insured or his estate to the economic benefits of the policy and includes among other things the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy.
Section 2039(a) of the Internal Revenue Code of 1954 provides that the entire value of an annuity or other benefit payable to beneficiaries of the decedent or his estate is includible in his gross estate. However, in the case of benefits distributed under a trust qualified under section 401(a), section 2039(c) provides, in effect, that the value of any benefits payable to any beneficiary, other than his estate, is includible in the proportion thereof that the total payments or contributions made by the decedent bears to the total contributions made, and for this purpose, contributions or payments bade by the decedent's employer shall not be considered to have been contributed by the decedent.
The Service has always considered the accumulated interest on a decedent's contributions to a qualified retirement plan as includible in the gross estate. This has been expressed in Rev. Rul. 56-1, C.B. 1956-1, 444, Commissioner v. Estate of Raymond W. Albright, 356 F. 2d 319 (2nd Cir. 1966), and Rev. Rul. 68-556, C.B. 1968-2, 408.
Although we are unable to furnish you with a specific ruling for Federal estate tax purposes we are considering publishing a Revenue Ruling on the subject.
N.Y. Comp. Codes R. & Regs. tit. 2, Appendices, app 11-A