Accidental Disability Retirement
The Accidental Disability Retirement Benefit described in Sections 411.6(5) and (6), Code of Iowa, is specifically for occupationally related injury or sickness and therefore can generally be excluded from taxable income under IRC Section 104. However, several IRS rulings and tax cases have created an exception to the general exclusion where the recipient's qualification for the Accidental Disability Benefits is based upon a statute that creates an irrebuttable presumption that a condition was occupationally related. See Rev. Rul. 85-105, 1985-2 CB 53; Take v. Comm., 82 T.C. 630 (1984). Chapter 411, Code of Iowa speaks specifically about a presumption of occupation relatedness for disabling disease attributable to heart, lungs or respiratory tract.
a. Causation by Heart, Lung or Respiratory Tract Disease. Several tax cases and rulings take the position that if qualification for "accidental" disability is determined not by the facts of a particular case but by reliance on an irrebuttable, conclusive presumption of qualification, then the benefit is not excludable from taxation. A 1984 IRS Private Letter Ruling issued to an Iowa police officer on accidental disability concluded that the language of Chapter 411, Code of Iowa created an irrebuttable, conclusive presumption of occupation relatedness for disabling disease attributable to heart, lung or respiratory tract, and, therefore, accidental disability retirement benefits attributable to a heart, lung or respiratory tract condition of the recipient were taxable income and not excludable. The IRS relied upon two Iowa cases -- Reisner v. Board of Trustees, 203 N.W. 2d 812 (Iowa 1973) and Benson v. Fort Dodge Police Pension Board 312 N.W. 2d 548 (Iowa 1981) -- in concluding that Iowa law created an irrebuttable, conclusive presumption.*
Subsequent to that 1984 IRS ruling, the Iowa Supreme Court has addressed the issue of conclusive presumption and a plurality of the Court stated that the presumption is rebuttable. See Larsen v. Board of Trustees of Police Ret. Sys. of City of Sioux City, 401 N.W. 2d 860 (Iowa 1987). Because the plurality of the Court making the statement that the presumption for heart, lung or respiratory tract condition is rebuttable contains justices in the dissent, the true holding is not clear. Nevertheless, sound legal arguments can be made that Chapter 411 does not create an irrebuttable presumption and accidental disability retirement benefits based upon heart, lung or respiratory conditions are therefore excludable from taxable income. A recipient receiving accidental disability retirement benefits should consult their tax advisor for advice on the appropriate tax treatment of their benefit payments.
In light of the above case, a recipient receiving accidental disability retirement benefits and who paid income tax (by reason of IRS contact or otherwise) on such benefits upon reaching normal retirement age should consult their tax advisor for specific advice on filing claims for refunds.
b. Causation by Other Than Heart, Lung or Respiratory Disease. In order to qualify for the Accidental Disability Retirement Benefits authorized in Section 411.6(5) and (6), Code of Iowa, for reasons other than heart, lung or respiratory disease, a member must have been determined to have been disabled "as the natural and proximate result of an injury or disease incurred in or aggravated by the actual performance of a duty." As a result, the requirement of IRS Section 104 and related regulations will necessarily be satisfied when a member is determined to be eligible for the Accidental Disability Retirement Benefit.**
Therefore, the Accidental Disability Retirement Benefits received for reasons other than heart, lung or respiratory tract condition are excludable from taxable income.
In light of the above case, a recipient receiving accidental disability retirement benefits who paid income tax (by reason of IRS contact or otherwise) on such benefits upon reaching normal retirement age should consult their tax advisor for specific advice on filing claims for refund.
*If treated as taxable, a portion of the accidental disability retirement benefit payable by reason of a heart, lung or respiratory tract condition may represent the return of the recipient's own contributions to the System and its predecessors and be excludable from taxable income for that reason. Also, even if treated as nontaxable, the IRS has recently taken the position on audit of several accidental disability retirement benefit recipients who have reached normal retirement age that the accidental disability retirement benefits became taxable upon the recipient reaching normal retirement age. An Iowa case was filed before the U.S. Tax Court (Docket No. 27551-92) to contest the taxable conversion of accidental disability retirement benefits upon the recipient reaching normal retirement age. It is the System's understanding that as of February 12, 1993, that the IRS has conceded that such benefits remain nontaxable, even upon the recipient reaching normal retirement age. The reason for the continued tax-exempt status is that disability benefits under Chapter 411 do not “convert” to regular retirement benefits upon attainment of a particular age.
**Even where treated as nontaxable, the IRS has recently taken the position on audit of several accidental disability retirement benefit recipients who have reached normal retirement age that the accidental disability retirement benefits became taxable upon the recipient reaching normal retirement age. An Iowa case was filed before the U.S. Tax Court (Docket No. 27551-92) to contest the taxable conversion of accidental disability retirement benefits upon the recipient reaching normal retirement age. It is the System's understanding that as of February 12, 1993, that the IRS has conceded that such benefits remain nontaxable, even upon the recipient reaching normal retirement age. The reason for the continued tax-exempt status is that disability benefits under Chapter 411 do not “convert” to regular retirement benefits upon attainment of a particular age.
The information set forth above is not specific tax advice on your particular situation. It is merely general information believed to be accurate which you can provide to your tax advisor for their independent review and confirmation in determining the appropriate tax treatment of your benefits.