26 U.S.C. § 105 — Amounts received under accident and health plans

(a) Amounts from employer contributions. Except as this section says otherwise, money an employee gets from accident or health insurance for a personal injury or sickness counts as taxable income to the extent it either (1) comes from employer contributions that weren't already taxed to the employee, or (2) is paid directly by the employer. (b) Amounts spent on medical care. Except for amounts already claimed as a medical-expense deduction in an earlier year, the money described in (a) is not taxable if it directly or indirectly reimburses the taxpayer for medical care (as defined in section 213(d)) for the taxpayer, spouse, dependents, or any child under 27 as of the end of the tax year. A child covered by a divorced-parents arrangement under section 152(e) counts as a dependent of both parents for this purpose. (c) Amounts unrelated to missing work. The money described in (a) is not taxable to the extent it (1) pays for permanently losing the use of a body part or function, or permanent disfigurement, of the taxpayer, spouse, or dependent, and (2) is calculated based on the injury itself, not on how much time the employee missed at work. (d) [Repealed.] (e) Accident and health plans. For this section and section 104, money received under an employer accident or health plan, or from a state or D.C. sickness and disability fund, counts as money received through accident or health insurance. (f) Rule for section 213. Amounts excluded from income under subsection (c) are not treated as insurance or other compensation for medical expenses, when applying the medical-expense deduction in section 213(a). (g) Self-employed people aren't "employees." For this section, "employee" does not include someone who is self-employed under section 401(c)(1). (h) Discriminatory self-insured plans favoring highly paid employees. (1) If a self-insured medical reimbursement plan discriminates in favor of highly compensated individuals for a plan year, subsection (b) doesn't protect the "excess reimbursement" those individuals get. (2) A plan avoids discrimination only if it doesn't favor highly compensated individuals in who can join, and doesn't favor them in the benefits provided. (3) On eligibility: a plan passes only if it covers at least 70% of all employees, or 80% of eligible employees when 70% or more of all employees are eligible; or if it covers a group the Secretary finds isn't set up to favor highly paid individuals. Employers may leave out of this count: employees with under 3 years of service, employees under 25, part-time or seasonal employees, employees covered by a good-faith collective bargaining agreement that addressed health benefits, and nonresident aliens with no U.S.-source earned income. (4) On benefits: a plan fails unless every benefit given to highly compensated participants is also given to everyone else. (5) "Highly compensated individual" means one of the 5 highest-paid officers, a shareholder who owns more than 10% of the employer's stock, or someone in the highest-paid 25% of employees (not counting certain excluded employees). (6) A "self-insured medical reimbursement plan" is an employer plan to reimburse the medical expenses described in (b) that isn't backed by an insurance policy. (7) "Excess reimbursement" for a highly compensated individual means: for a benefit not offered to everyone, the full amount reimbursed for that benefit; and for other benefits under a discriminatory plan, the individual's reimbursement multiplied by the fraction of all plan reimbursements that went to highly compensated individuals that year (not counting amounts already covered above). (8) All employees in certain related company groups under section 414 are treated as employed by one employer for this section. (9) The Secretary may issue regulations needed to carry this section out. (10) A reimbursement is taxed in the participant's tax year that the plan year ends in. (i) Railroad sick pay. Sick-pay benefits under the Railroad Unemployment Insurance Act count as taxable income, except to the extent the sickness resulted from an on-the-job injury, as the Railroad Retirement Board determines. (j) Special rule for certain government plans. (1) Payments from an accident or health plan described in paragraph (2) don't lose their tax-free status under (b) just because the plan, on or before January 1, 2008, also reimburses health expenses of a deceased employee's beneficiary (other than a spouse, dependent, or child described in paragraph (3)(B)). (2) A plan qualifies here if it's funded by a medical trust connected to a public retirement system or set up by a state or local government, and that trust is either authorized by a state legislature or has an IRS ruling that its income isn't taxable under section 115 or 501(c)(9). (3) "Qualified taxpayer" under paragraph (1) means an employee, or that employee's spouse, dependent, or child (as defined for subsection (b)).