Saturday, October 6, 2018
Kathryn Kisska-Schulze (Clemson) & Adam Epstein (Central Michigan), The Claim Game: Analyzing the Tax Implications of Student-Athlete Insurance Policy Payouts, 25 Jeffrey S. Moorad Sports L.J. ___ (2018):
Prior to the 2016-2017 season, quarterback Deshaun Watson accepted two $5 million insurance policies paid for by Clemson University to protect him against a career-ending injury while playing college football, as well as the potential loss-of-value he might suffer should an injury prompt a drastic drop in the NFL draft. An interesting question regarding insurance premiums paid for by universities on behalf of student-athletes is whether such payouts are taxable. The Internal Revenue Code (IRC) dictates the tax consequences of disability payouts based on who pays for a disability policy - an individual or their employer. As student-athletes are not employees of their universities, there is no clear guidance as to the tax consequences of proceeds received from an insurance policy when the party paying for part or all of the premium is not their employer. This article analyzes the tax consequences of payouts received by student-athletes under various parameters associated with premium payments.
This article focuses on two scenarios to determine whether injury payouts received by student-athletes are taxable. We first explore the tax consequences of payouts if the premium payments are either purchased individually by the student-athlete or financed through a private loan. Second, we examine the taxability of payouts when a college or university pays the cost of the premium for the benefit of the select student-athlete. We surmise that to best ensure a tax-free payout from an ESDI or LOV insurance policy, a student-athlete should purchase the policy individually. We also conclude that treating premium payments as a loan provides a sound opportunity to minimize or eliminate tax imposition on payouts received. We finally conclude that the IRS is unlikely to impose a tax on disability payouts made to student-athletes when their college or university pays the premium on their behalf. We further recommend that the IRS publish a Revenue Ruling to address the taxability of proceeds received from disability insurance policies purchased for student-athletes by their universities to clarify whether universities are considered employers in this context, provide uniformity in applying the IRC to disability insurance policies paid for by universities, and confirm whether the IRS intends to continue its historically favorable tax treatment of student-athletes.