Employee Allowed a Deduction for Supplemental Unemployment ...

December 30, 2011 by Ed Zollars, CPA

The IRS ruled in PLR 201152005 that an employee who paid premiums that were meant to provide supplemental unemployment benefits should the employee lose his/her job were deductible as employee business expenses under IRC ?162.

The employee could elect to participate in the supplemental unemployment insurance program through voluntary withholding from his/her paycheck.? The payments, made from after tax funds, would be remitted by the employer to the insurance company.? The policy could be continued by the employee if he/she moved on to a new employer, though the rate might be changed based on the experience rating with the new employer.

If the employee received state unemployment benefits, the policy would pay a supplemental amount to the employee after the employee had been paid two weeks of state unemployment and would continue for the shorter of 24 weeks or when the employee no longer received state unemployment benefits.

The taxpayer asked for two rulings, though likely the taxpayer believed that only one of the two would be granted.? The taxpayer asked the IRS to rule:

• The payment of the insurance premiums were an ordinary and necessary trade or business expense deductible under IRC ?162 and
• Any benefit payments received would not taxable income to the employee under IRC ?61

The IRS ruled the premiums were deductible. While the IRS had ruled in Revenue Ruling 81-193 that payments by an employee for non-occupational disability benefits that caused a loss of employee were not deductible, the IRS noted that such insurance insured against loss of wages due to nonoccupational hazards rather than from business hazards.? That distinction rendered those premiums a personal expense, nondeductible under IRC ?262.

However the supplemental uninsurance premiums are similar to business continuation insurance, as the policy insures the employee will face a continuation of ?revenue? even in the face of a loss of his/her current employment.? The PLR notes that the above cited Revenue Ruling ?strongly infers? that such insurance is deductible, and thus holds that the employee will receive a deduction.

However, having granted the deduction the IRS did not provide that receipt of benefits would be nontaxable.? In this case the IRS noted that receipt of the benefit was an ?accession to wealth? and thus the entire proceeds received would be includable in the employee?s income under ?61.

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Source: http://ascpa.wordpress.com/2011/12/30/employee-allowed-a-deduction-for-supplemental-unemployment-insurance/

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