The Senate-passed version of the Protect College Sports Act (PCSA) added in a requirement that schools provide compensation for sports-related injuries or medical conditions, but might have accidentally made it taxable compensation. A quick and easy clarification would preclude the possibility.
The Problem
In the latest version of the PCSA passed by the Senate last night, a new provision was added aimed at helping athletes with medical expenses incurred in the course of competing. Under this new provision, schools with over $20 million in annual athletics revenue must cover all out-of-pocket medical expenses incurred by athletes from injuries or conditions related to competing in college athletics, for up to five years after the athlete last competes on behalf of the school (or for life in the case of lifelong conditions). Smaller schools could avail themselves of a fund that the NCAA will be obligated to establish.
Congress is trying to help college athletes avoid financial hardship. But what about the taxes?
Throughout the drafting of the PCSA, the Senate has avoided addressing the question of whether college athletes are employees or independent contractors at all costs. The PCSA is explicitly neutral on that question. But, in its caution to avoid touching that political hot iron while still establishing wide-ranging benefits for college athletes, it may have inadvertently created substantial tax liability for college athletes.
When an employee receives payments on medical insurance premiums from their employer, the Internal Revenue Code (IRC) clearly establishes that these payments are tax deductible.1 However, the vast majority of college athletes are not in an employment relationship with the school they compete on behalf of, even when they earn name, image, and likeness (NIL) income. Tax treatment of medical expense reimbursement for independent contractors is far murkier.
Consider a situation where an athlete suffers a major injury. The school’s athletic program doctors advise him to get a surgery that would knock him out for the whole season and result in a long and arduous rehab process. He goes and receives a second opinion from another doctor, who suggests an innovative new technique that will allow him to get back on the field sooner. Confident that the school will cover these expenses as mandated under the PCSA, the athlete goes with the second option, only to find that the IRS considers this to be a taxable fringe benefit. The tax liability could be enormous and crushing.
The potential saving grace here is the existence of IRC §104(a)(3), which excludes “amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness.” The IRS may well determine that the way schools comply with the PCSA falls under that category. However, the IRS has indicated in the past that IRC §104(a)(3) does not necessarily apply if the compensation is “merely a reimbursement arrangement.”
The even bigger problem is that there is no specificity surrounding how medical expense compensation under the PCSA would operate. All of the following seem to comply with the letter of the medical coverage requirements included in the PCSA:
- A school reimbursing an athlete directly for out-of-pocket medical expenses.
- A school paying a provider directly for an athlete’s out-of-pocket medical expenses.
- A school simply offering all athletes access to the school’s health care plan and waiving deductible and premium payments.
- A school reimbursing an athlete for the cost of purchasing private insurance.
- A school establishing and funding its own accident insurance plan available to its athletes.
The IRS could easily determine that IRC §104(a)(3) applies to only some of these arrangements. §162(l), for example, allows a deduction for self-employed individuals’ insurance costs, but applies only to income tax and not self-employment tax. The IRS could well decide that certain arrangements above constitute compensation covered under §162(l) instead of §104(a)(3). State revenue departments could have differing views on the taxability of this type of compensation as well.
The Good News
Fortunately, the PCSA still has one more chamber of Congress to make it through before it becomes law. Congress could simply add a brief provision into the PCSA that the medical coverage requirements under the PCSA qualify as §104(a)(3) compensation, taking all the tax guesswork out of the equation.
The PCSA is already glaringly thin on solutions to the myriad tax problems that college athletes are facing today. The least it can do is make sure that the PCSA doesn’t put more on their plate.
1 They are also deductible in 48 states (with the exception of Pennsylvania and New Jersey).