Financial counseling services to spouse of deceased or terminally iII employee are income.

In Letter Ruling 9929043, the Service held that personal financial services provided by an employer to a deceased or terminally ill employee's spouse or other legal dependent are includible in income, while, apparently, the same services provided to a terminally ill employee are excludible. Under present law, there is no specific exclusion for employer-provided retirement planning services; however, such services may be excludible as employer-provided educational assistance or as a fringe benefit.

Under the facts of the ruling, the company intends to adopt a plan to provide personal financial counseling services to survivors of deceased employees and to survivors of eligible employees diagnosed with a terminal illness. Eligible employees include both full- and part-time employees who have been employed by the company for more than three months. "Survivor(s)" of an eligible employee include the deceased or terminally ill employee's spouse and legal dependents (as defined under Sec. 152) and other appropriate, persons as determined by the company.

Under the plan, the following services will be provided at no cost to the survivor(s): On an eligible employee's death or diagnosis with a terminal illness, the employee's survivor(s) will be entitled to a meeting with a company financial planner for the purpose of assisting the survivor(s) in planning his financial affairs. The meeting will cover benefit election forms; tax aspects of benefit plan distributions; application for employer and government benefits; budgeting and cashflow; understanding the estate settlement process; life insurance proceeds investment and other beneficiary distributions; and estate tax planning. The financial planner will prepare a financial plan and a long-term cashflow analysis. Following a one-on-one review of the plan with the financial planner, the survivor(s) will receive proactive periodic contact to offer additional support and guidance. Survivor(s) will also be entitled to access the company's financial counseling hotline. In addition, written materials will be provided on personal financial planning.

Under present law, certain employer-provided fringe benefits are excludible from gross income and wages for employment tax purposes. These excludible fringe benefits include working-condition fringe benefits and de minimis fringes. Sec. 132(a)(3) excludes from gross income any fringe benefit that qualifies as a working-condition fringe. Sec. 132(d) defines "working-condition fringe" as any property or services provided by an employer to an employee to the extent that, if the employee paid for the property or services, the payment would be allowable as a deduction under Sec. 162 (trade or business expenses) or 167 (depreciation). For purposes of working-condition fringe benefits, Regs. Sec. 1.132-1(b)(2) provides that the term "employee" includes any individual currently employed by the employer providing the benefit.

In the ruling, the IRS apparently determined that financial planning was a working-condition fringe benefit under Sec. 132(a)(3) and, thus, was excludible from the employee's income; however, it stated that Sec. 132(a)(3) does not include within the definition of "employee" the widow or widower, or dependents of a deceased or living employee. By contrast, for purposes of other Sec. 132 fringe benefits (such as no-additional-cost services and qualified employee discounts), the Service noted that the term "employee" includes a widow or widower or a dependent child (Kegs. Sec. 1.132-1(b) (1)). The Service reasoned that the definition of "employee" is narrower for working-condition fringes, because of the requirement under Sec. 132(d) that the hypothetical payment be in connection with the employee's performance of services for the employer.

As a result, the IRS concluded that benefits provided to a spouse or other legal dependent of a deceased or terminally ill employee may not be excluded from gross income under Sec. 132(a)(3). Apparently, if the financial planning services are provided to a spouse or other nonemployee during the employee's lifetime, the fair market value of such services is includible in the employee's income under Kegs. Sec. 1.61-21 (a)(4) but, if provided after the employee's death, is includible in the survivor's income.

FROM BOB COPLAN, WASHINGTON, DC