Over the past few years, more and more colleges and universities have been doling out tens of thousands of dollars to purchase disability insurance policies on behalf of individual star athletes. The schools are using money earmarked for student-athletes with special financial needs received from the National Collegiate Athletic Association (NCAA) to pay for these policies. Many view this development as a windfall for those students on whose behalf the insurance policies are purchased. However, until now, an important issue regarding this process has remained unresolved: what are the federal income tax implications when a school pays the disability insurance policy premiums for a student-athlete? This article provides a first-of-its-kind analysis regarding those tax implications. Specifically, it looks at:
The growing trend of schools purchasing PTD and LOV insurance
Prior to the start of the 2019 college football season, Tua Tagovailoa, the star quarterback for the University of Alabama, was generally recognized as a sure fire top-five pick in the 2020 NFL Draft if he forfeited his senior season and declared himself eligible for the draft. That all changed for Tua on November 16, 2019, during Alabama’s game against Mississippi State University. With 3:01 remaining in the first half, and his team leading 35-10, Tua rolled to his left and threw a pass. After the ball left his hand, two Bulldog defenders landed on top of Tua and drove him to the ground. Tua suffered a dislocated right hip as well a fracture to the posterior wall of that hip and, two days later, he underwent successful hip surgery.
In the aftermath of Tua’s injury, it was reported1 that Alabama had purchased PTD insurance policy for him at a cost of approximately $5,000 and $6,000 for every $1 million worth of coverage; i.e., a $5 million PTD policy would have cost the school approximately $27,500 to purchase. Tua’s PTD policy would have paid Tua a lump sum benefit (the actual amount of coverage is unknown) if he were unable to play professional football because of an injury or illness sustained in college during the policy period. By all accounts2, Tua will be able to play football professionally, so he will most likely never have a claim under the PTD insurance policy that Alabama bought for him.
Over the past several years there has been a trend in college sports for those schools to purchase PTD insurance for their high-profile athletes to also buy additional LOV insurance, as a rider on the PTD policy. LOV coverage insures the difference between the anticipated value of a student-athlete’s first professional contract and the reduced value of the professional contract the athlete actually signs because he suffered an injury or illness during the policy period and where the injury or illness was the sole cause of the drop in contract value.
LOV coverage is attractive to many student-athletes because, as in Tua’s case, an injury causing a drop in one’s draft position and thereby reducing the value of his first contract, is more likely to occur than the type of permanent and total disability that might trigger a PTD payout. Some schools, like the University of Alabama for example, have a policy against purchasing3 LOV coverage for any athlete, opting instead for buying more PTD policies. For those schools that do buy the additional LOV coverage, the premium costs are approximately $10,000 to $11,000 per million so, using the example above, $5 million of LOV coverage on top of $5 million PTD might have cost Alabama a total of about $75,000.
An often-overlooked aspect of PTD/LOV insurance purchased by a school for a student-athlete is the personal income tax consequences of the tens of thousands of dollars in premiums that a school pays to secure the coverage for the athlete or of the benefits received under these types of insurance coverages. Perhaps to the surprise of the student-athlete, for federal income tax purposes, the premiums paid by the school are taxable income to him, and perhaps to the satisfaction of the student-athlete, the insurance payments are likely to be tax-free.
The NCAA’s disability insurance programs for student-athletes
For nearly 30 years, the National Collegiate Athletic Association (NCAA) has offered PTD insurance to student-athletes. In October 1990, the NCAA established the “Exceptional Student-Athlete Disability Insurance Program” (ESDI), which originally only covered student-athletes participating in football and men’s basketball. Six months later, the program was expanded to include college baseball players and, two years after that, it was further expanded to include men’s ice hockey players. Finally, in 1998, student-athletes participating in women’s basketball were also eligible to purchase this type of insurance coverage.4
The NCAA has established5 maximum policy limits of PTD insurance coverage available to purchase by athletes based upon their respective sport; i.e., $10 million for football and men’s basketball; $5 million for baseball; $3 million for men’s ice hockey and $250,000 for women’s basketball. Unlike PTD insurance, the NCAA does not offer separate LOV insurance coverage. Instead, LOV coverage is offered as a rider or endorsement on a PTD policy. To participate in the ESDI program, student-athletes must be projected to be drafted in either the first round of the Major League Baseball, National Basketball Association or WNBA drafts, or the first three rounds of the National Football League or National Hockey League drafts.
Who pays the policy premiums for PTD/LOV insurance coverage?
Before October 15, 2014, student-athletes who wanted to buy PTD/LOV insurance had to pay the policy premium themselves and were prohibited from being allowed to borrow against their future earnings to pay those premiums. Not surprisingly, this proved to be an impediment for many student-athletes. However, on that date, the NCAA approved a waiver6 of the association’s amateurism bylaws7 which allowed student-athletes to use their future earnings potential as collateral to secure a loan to pay the for the PTD/LOV insurance premiums. Although the 2014 waiver ruling only affected the handful of student-athletes who might play professional sports it nevertheless represented a significant departure from the NCAA’s previous position on the subject.
This waiver occurred three months after Texas A&M University became one of the first schools to publicly reveal8 that it had used money received from the NCAA’s Student Assistance Fund (SAF) program—money earmarked to help student-athletes pay for unexpected and extraordinary expenses such as bereavement travel, child care, and utility bills—to pay the $50,000 PTD/LOV policy insurance premium for offensive tackle Cedric Ogbuehi, who was later drafted in the first round of the 2015 NFL Draft9. Although the NCAA claims it never specifically disallowed the use of SAF money to pay insurance policy premiums10, the practice has become more widespread since Texas A&M asked for clarification about the practice in the summer of 2014 and was told that such spending was permissible.
The SAF program arose out of the 2008 settlement in the Jason White v. NCAA antitrust lawsuit11 whereby the NCAA agreed to make available $10 million in supplemental money to certain college athletes and to also distribute at least $218 million over six years to schools for use under the Student-Athlete Opportunity Fund (SAOF). Since these two events in 2014, there has been a growing trend among schools to use SAF money to pay the premiums for PTD/LOV insurance policies. At the time of the White settlement, the NCAA had an established fund known as the Special Assistance Fund, which could only be used to assist needy athletes with basic necessities or used for emergencies as well as the less restrictive SAOF which helped pay for incidental expenses. The NCAA has since restructured the two funds into segregated funds within a single Student Assistance Fund.
According to the NCAA, a total of $86.6 million in SAF money was sent to Division I conference for the 2018-19 year. Some of that money has been used by schools to pay insurance premiums to secure LOV coverage for star football players. The NCAA’s most recent data12 show 87,000 student athletes received funds through the SAF in 2011-12. The funds are distributed to conferences, and each conference devises its own method of funding for schools. For example, the Big Ten uses a complex formula to divide the SAF among member institutions at the beginning of each academic year, taking into account the number of student athletes and scholarships at each institution.
(Note above numbers are in millions)
According to the NCAA13, the “Student Assistance Fund (SAF) is distributed to conference offices in late June and is segregated into two funds, the Special Assistance Fund and the Student-Athlete Opportunity Fund” and “the only distinction between these funds is the calculation methodology.”14 Among the reported uses by schools of the $82.2 million in SAF money that was distributed in 2016-17, the second largest amount ($22 million or 26%) was spent by schools on “Health and Safety Expenses” including insurance policy premium payments. The largest expense category ($39.7 million or 48%) was spent on “Educational Expenses.”
Some schools, like the University of California at Los Angeles (UCLA), for example, refuse to pay for a PTD insurance policy directly and, instead, require the student-athlete to pay the premium costs themselves, usually in the form of a loan obtained from an “established, accredited commercial lending institution.” UCLA will reimburse the student-athlete for such insurance premium costs after the student-athlete either exhausts their NCAA eligibility, or signs a contract with a professional team, or becomes eligible to recover proceeds under the PTD policy. To be reimbursed by UCLA for such costs, the student-athlete must also maintain their amateur status and “leave UCLA academically eligible and in good academic standing pursuant to NCAA & UCLA regulations.” If those and other conditions are met, UCLA will reimburse the student-athlete for the insurance premium payments in much the same way other schools use SAF money received from the NCAA to front the costs of insurance policy premiums.
Regardless of whether a school directly pays the policy premiums for an insurance policy protecting one of its high-profile student-athletes or the school reimburses the student-athlete for such those costs, the premium payments presents federal income tax issues that are analyzed for the first time below.
Federal income tax issues
According to an Internal Revenue Service FAQ sheet: “If you pay the entire cost of a health or accident insurance plan, don’t include any amounts you receive for your disability as income on your tax return.” In other words, if a student-athlete or their family pays the insurance policy premiums any payout would most likely not be subject to federal income taxes. Conversely, if someone other than the athlete pays the policy premiums—like a student-athlete’s school—then the question becomes whether the student-athlete must pay federal income tax on the cost of that premium or on any insurance policy payout.
The tax implications arising out of a school directly or indirectly paying the insurance policy premiums for PTD insurance covering a student-athlete is an important issue for those athletes, especially given the millions and tens of millions of dollars being paid to involved early round draft picks in their first professional contracts and the resulting income tax brackets in which those players suddenly find themselves. Paying income tax on the premiums paid by a school is tax out-of-pocket today, but, in the long run, a tax-free insurance payout could mean millions of dollars of tax-free income.
Although the IRS has yet to issue official guidance regarding the possible federal income tax consequences to a student-athlete whose PTD insurance policy premium is paid by his or her school using SAF money received from the NCAA, the situation presents two basic income tax issues for the student-athlete. First, what are the income tax consequences of the premiums by schools out of the SAF? Second, what are the income tax consequences should a student-athlete receive a payout under a PTD and/or an LOV policy?
As to the first question, a student-athlete is likely to be subject to federal income tax on the amount of the premiums paid by a school for PTD insurance policies regardless of whether or not paid out of funds available under the SAF program. The premiums can be likened to scholarship payments on behalf of the student-athlete, and certain scholarship payments, i.e., “qualified scholarship” payments, are not subject to income tax when paid to, or on behalf of, a student. PTD policy premium payments, however, are not qualified scholarship payments, so a student-athlete will likely be taxed on the premiums paid by his or her school rather than on any subsequent payouts under such a policy (if any).15 Indirect premium payments, such as a school reimbursing a student-athlete for a loan secured by the student-athlete to pay the premium for a PTD policy, are also likely subject to federal income tax.
In general, a payout under a PTD insurance policy, with or without a LOV rider, is likely to be tax-free to a student-athlete regardless of whether the school pays the premium or reimburses the student-athlete for paying the premium.16 This follows because, as described above, the student-athlete pays the premiums (or is deemed to pay the premiums) with after-tax dollars. Payment with “after-tax dollars” means that the premium payments were included in the student-athlete’s gross income—they were not eligible for some exemption from gross income. That exemption typically arises only in an employer/employee relationship when a payout is attributable to certain payments by the employer which were not includible in the gross income of the employee.17 So, unless and until student-athletes become school employees, that exemption should not apply. In the end, the trade-off for the student-athlete for including the premium payment in income is the potential to receive a tax-free payout under a PTD policy including any LOV coverage purchased.
Regardless of who pays the premiums on a PTD policy, any student-athlete covered under such a policy should consult his or her tax advisor regarding the federal income tax consequences of the premiums and potential payouts on a PTD policy, as well as potential state and local taxes.18
1 Darren Rovell, “Tua Tagovailoa Has No Protection Against Possible Multi-Million-Dollar NFL Draft Fall,” actionnetwork.com, November 22, 2019. (Last accessed February 11, 2020.)
2 Paul Kasabian, “Report: Tua Tagovailoa Had Positive Checkup on Injury Before Entering NFL Draft,” bleacherreport.com, January 7, 2020. (Last accessed February 11, 2020.)
3 See Footnote 1.
4 Exceptional Student-Athlete Disability Insurance Program, ncaa.com. (Last accessed February 11, 2020.)
5 See Footnote 4.
6 Creg Stephenson, “College athletes can borrow toward purchase of 'loss of value' insurance under new bylaw waiver,” ai.com, January 13, 2019. (Last accessed February 11, 2020.)
7 Bylaws 12.1.2 (amateur status) and 16.11 (benefits, gifts and services)
8 Kristi Dosh, “Assistance funds pay tab to insure stars,” sportsbusinessdaily.com, January 12, 2015. (Last accessed February 11, 2020.)
9 See Footnote 8.
10 See Footnote 8.
13NCAA 2019 Division I Revenue Distribution Plan (Last accessed February 11, 2020.)
14 NCAA’s 2018 Division 1 Revenue Distribution Plan at p. 14
16 I.R.C. § 104(a)(3).
17 I.R.C. § 106(a).
18 Note: Student athletes are provided with a 1098-T [Tuition] Form. See Patrick Michael Tutka, Dylan Williams, The Expensive Truth: The Possible Tax Implications Related to Scholarship and Cost of Attendance Payments for Athletes. (Last accessed February 11, 2020.)