Office of Personnel Management

Retirement and Insurance Service

1920 1954 1959 1986 

 

Benefits Administration Letter

Number: 96-206 Date: September 12, 1996 

SUBJECT: Federal Employees' Group Life Insurance: Tax Treatment of Living

Benefits and Viatical Settlements

 

Purpose The purpose of this letter is to notify agencies of a change in

the Federal income tax law affecting accelerated death

benefits under the Federal Employees' Group Life Insurance

(FEGLI) Program. 

 

What are 

"accelerated death 

benefits"?

The term "accelerated death benefits" includes:

the payments received through the Living Benefits

provision of the FEGLI Program, and 

payments received from viatical settlement firms

resulting from the assignment of FEGLI coverage.

 

Old tax provision Under Federal income tax law affecting payments received

during 1996 and earlier, Living Benefits payments and

payments from viatical settlement firms are subject to

Federal income tax.

 

New tax law Under Public Law 104-191, the Health Insurance Portability

and Accountability Act of 1996, Subtitle D, Treatment of

Accelerated Death Benefits, Living Benefit payments and

qualified payments from viatical settlement firms received

after December 31, 1996, will not be subject to Federal

income tax.

 
Effective date of new

tax law 

 

The new tax law affects payments received after December

31, 1996. It has no affect on payments received on or before

that date.

 

What are "qualified 

 payments from 

 viatical settlement 

firms"?

The new tax law sets qualification standards for viatical

settlement providers, terminally ill insured persons, 

chronically ill insured persons, and, in the case of

chronically ill insured persons, how the payment may be

spent. Since the Internal Revenue Service, not OPM,

administers Federal income tax law, employees who are

considering assigning their insurance to a viatical settlement

firm should consult a competent tax advisor to determine if

they and their viatical settlement firm meet the qualification

standards. It is clear, however, that to be considered

terminally ill, a person's life expectancy can be no more than

24 months.

 

Advice to employees Employees may want to postpone their Living Benefits or

viatical settlement payments until 1997 in order to take

advantage of the change in the tax law. Therefore, it is

important for employing offices to inform employees who

want to elect Living Benefits or to assign their insurance to a

viatical settlement firm that the tax law has changed. 

Employing offices should not attempt to give tax advice, but

should advise employees to consult a tax advisor if the

employee is interested in the tax savings that could result

from postponing receipt of the payments.

Recognizing that prompt receipt of the payment may be

more important to some terminally ill employees than a tax

savings, agencies should not attempt to prevent them from

promptly completing these transactions if that is their

preference.

 

When is a payment 

 considered to be 

received?

The determination of when a payment is considered to be

received must be made by IRS, not OPM. However, in the

case of Living Benefits, an employee may ensure that he or
she will not receive the payment before January 1, 1997, by

waiting until at least mid-December before returning the

claim form (FE-8) to the Office of Federal Employees'

Group Life Insurance (OFEGLI). OFEGLI has begun

informing employees who request an FE-8, Claim for Living

Benefits, by including a copy of the attached notice when

they send the claim form.

In the case of an assignment to a viatical settlement firm, the

employee may request that the firm not make the payment

before January 1, 1997.

 

Are State taxes 

affected?

This law amends the Federal Internal Revenue Code, which

directly affects Federal income tax, not State taxes. 

However, many States have laws, regulations, or rulings

concerning the taxability of accelerated death benefits. 

Many States use Federal adjusted gross income as a base for

calculating income subject to State tax. Therefore, an

employee's taxable income under State law may also be

affected by the date these payments are received. Employees

may consult a tax advisor, tax counsel, or their State's tax

department for specific information concerning State income

tax laws.

 

Abby L. Block, Chief

Insurance Policy and

 Information Division

Attachment
Attachment to BAL 96-206

Notice that OFEGLI is sending out with the FE-8, Claim for Living Benefits

NOTICE CONCERNING TAXATION AND WITHHOLDING

Under present law, Living Benefits are included in gross income for Federal tax

purposes, as well as most state tax purposes.

However, Living Benefits received after December 31, 1996 will be excluded from

gross income for Federal tax purposes. (Section 331 of the Health Insurance Portability

and Accountability Act of 1996.)

If you want to be certain that you will not have any Federal income tax liability from

Living Benefits, you should not submit this claim form until mid-December. This will

ensure that you will not receive Living Benefits until after December 31, 1996, and

therefore the payment will not be subject to Federal income tax. In addition, if you wait

until mid-December to submit this form, you should not complete Part A, Item 11 on

the claim form (FE-8) because Living Benefits payment made after December 31, 1996,

will not be subject to Federal tax withholding. 

If you need the money earlier, feel free to submit your claim form at any time. 

However, please note that you will be subject to Federal income tax on any amount

received on or before December 31, 1996. In January of 1997 we will send you a Form

1099-R reporting the amount of Living Benefits that you received. This information

will also be reported to the Internal Revenue Service (IRS). In addition, any payment

you receive on or before December 31, 1996, will be subject to Federal income tax

withholding unless you elect not to have withholding apply. 

You may elect not to have withholding apply to your distribution by checking

the box in Part A, Item 11 on the claim form (FE-8). If you do not check the

box, Federal income tax will be withheld at a rate of 10 percent. 

If you elect not to have withholding apply, or if you do not have enough

withheld, you may be responsible for payment of estimated tax. You may incur

penalties under the estimated tax rules if your withholding and estimated tax

payments are not sufficient. 

The new law amends Section 101 of the Internal Revenue Code which is the law for

Federal income tax purposes. Some states have issued specific laws, regulations and

rulings concerning the taxability of accelerated death benefits (the generic name for

FEGLI Living Benefits). Many states use Federal adjusted gross income as a base for

calculating income subject to state tax. Since FEGLI Living Benefits received after

December 31, 1996, will be excluded from Federal adjusted gross income, state taxable
income could be affected as well. You should consult your tax advisor, tax counsel, or

State tax department for more information concerning your liability for state income tax

on FEGLI Living Benefits. The new law requires the reporting of accelerated death

benefits to the IRS and the recipients of FEGLI Living Benefits on a form to be

prescribed by the IRS.