Can You Deduct Attorney Fees Paid to Recover ERISA Benefits?
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At Dorian Law, we understand that dealing with denied ERISA benefits like long-term disability, life insurance, AD&D, and health insurance can be stressful. You might also be wondering about the tax implications of hiring an attorney to help you recover these benefits. Here's what you need to know about whether you can deduct the attorney fees you paid.
The Basics: ERISA and Your Benefits
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that protects your benefits from employer-sponsored plans, such as retirement and health plans. This law sets standards for how these plans must be managed and ensures you receive the benefits you've earned. Sometimes, disputes arise, and you might need to hire a lawyer to help you get the benefits you deserve.
Can You Deduct Attorney Fees? The Short Answer is Yes
Generally, yes, you might be able to deduct the attorney fees you paid to recover certain ERISA benefits. This is often the case when the benefits you are trying to recover are considered taxable income. However, it's important to understand some key rules and how tax laws have changed.
The "Above-the-Line" Deduction: What It Means for You
Attorney fees related to recovering benefits from employer-sponsored plans often fall under a special category called "above-the-line" deductions. These deductions are subtracted directly from your gross income, which can lower your overall taxable income, and you don't have to itemize to claim them.
Internal Revenue Code (IRC) Section 62(a)(20) and (21) specifically allow a taxpayer to deduct costs and attorney fees involved in discrimination suits, which includes actions related to disability income benefit awards under ERISA. The definition of unlawful discrimination under IRC Section 62(e)(18) is broad and encompasses claims arising from federal, state, or local law, as well as common law claims, that regulate any aspect of the employment relationship, including claims for wages, compensation, or benefits. Therefore, if an ERISA case, such as a denial of disability benefits, is considered a claim related to the employment relationship and potentially unlawful discrimination, the associated attorney fees could be deductible above the line.
The IRS has also provided some guidance on this through Private Letter Rulings. For example, in Private Letter Ruling 200550004, the IRS ruled that attorney fees paid to recover pension benefits under ERISA were deductible under Section 62(a)(20), viewing the claim for benefits as one involving unlawful discrimination related to the employment relationship. While these rulings are specific to the taxpayer who requested them, they offer insight into the IRS's interpretation.
However, the deductibility of attorney fees in ERISA cases is not universally guaranteed and often hinges on whether the case is viewed as related to employment or other personal matters.
The "Origin of the Claim" Doctrine: Why It Matters
The tax deductibility of your attorney fees often depends on the "origin of the claim." This means the IRS looks at the reason you hired the attorney in the first place. If the ERISA dispute arises directly from the terms and conditions of employment and involves benefits earned through that employment, it is more likely to be treated as an employment-related claim for tax purposes.
The Impact of the Trump Tax Law (Tax Cuts and Jobs Act of 2017)
Before 2018, you might have been able to deduct some legal fees as a miscellaneous itemized deduction if they exceeded 2% of your adjusted gross income. However, the Tax Cuts and Jobs Act of 2017 eliminated most of these miscellaneous deductions. The good news is that the "above-the-line" deduction for attorney fees related to employment claims, including many ERISA benefit disputes, was preserved.
IRS Interpretation: What the IRS Looks For
When it comes to settlements and legal fees, the IRS pays close attention to how the settlement agreement is written. While the IRS generally considers all payments from employment-related claims (including amounts for attorney fees) as part of your gross income, the "above-the-line" deduction helps offset this.
Important Limitations and Conditions
Taxability of Benefits: If the benefits you recover are not taxable (e.g., if you paid your disability insurance premiums with after-tax dollars), you usually cannot deduct the related attorney fees.
Deduction Limit: The total amount of attorney fees and court costs you deduct cannot be more than the amount of income you received from the lawsuit in the same tax year.
Reporting Your Deduction: You'll typically claim this deduction on Schedule 1 (Form 1040), line 24(h), specifically for attorney fees and court costs from certain unlawful discrimination claims.
Keep Detailed Records: It's crucial to keep all records of your legal fees and any settlement documents.
What Types of ERISA Cases Might Qualify?
Long-Term Disability Benefits: If you hired us to recover taxable long-term disability benefits, your attorney fees are likely deductible.
Breach of Fiduciary Duty: Cases involving mismanagement of employer-sponsored benefits might also qualify, as they relate to your employment.
Health Insurance, Life Insurance, and AD&D Claims: If these benefits are taxable and stem from your employment, the attorney fees to recover them could be deductible.
What About Self-Funded Health Plans and ERISA Liens?
If your employer has a self-funded health plan that places a lien on your settlement from a third party (like a car accident), you generally cannot deduct your attorney fees from the amount you have to repay to the health plan.
Dorian Law Can Help You Navigate ERISA
Understanding the intersection of ERISA law and tax regulations can be complex. If you've had your ERISA benefits denied and have worked with Dorian Law to recover them, we strongly advise you to consult with a qualified tax professional to get personalized advice based on your specific situation.
Disclaimer: The information provided here is for general knowledge and informational purposes only, and does not constitute tax advice. You should consult with a qualified tax advisor for advice regarding your specific tax situation.