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Some 419 Insurance Welfare Benefit Plans Continue To Get Accountants Into Trouble

Popular so-called "419 Insurance Welfare Benefit Plans," sold by most insurance professionals, are getting accountants and their clients into more and more trouble. A CPA who is approached by a client about one of the abusive arrangements and/or situations to be described and discussed in this article must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign returns that fail to properly disclose listed transactions, including those discussed herein.

On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5), there must be cash value life insurance within the plan and excessive tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must have been claimed.

In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of benefits to owners and/or key and highly compensated employees. The notice identified numerous specific concerns, among them:

1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-
retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.

Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating in these listed transactions should have, in most cases, already disclosed such participation to the Service. Those who have not should do so at the earliest possible moment. Failure to disclose can result in severe penalties – up to $100,000 for
individuals and $200,000 for corporations.

Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on owner employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the Service declared, interposition of a trust does not change the nature of the transaction.

LANCEWALLACHEXPERTWITNESS.INFO

2 comments:

  1. Companies who set up IRS Code Section 419 Welfare Benefit Plans that were funded by life insurance are finding they've got big problems. Although insurance agents told business owners that their contributions would be tax deductible, they're actually reportable transactions – which has left many companies owing taxes they simply can't pay.
    What is a 419 welfare benefit plan?

    A welfare benefit plan is effectively a corporate-sponsored insurance plan, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He explained, “A corporation sets up a trust to provide insurance benefits for its employees. That’s the basic concept behind it. The corporation's contributions into the trust are tax-deductible and many of these plans allow you to pick and choose which employees you want involved in the plan.”

    Abuses with plans funded with life insurance

    Burgess says that while not all of these plans bad, the ones that are bad are very abusive – and those generally happen with plans that are funded with life insurance and that are commission-driven. He told us:

    Basically what happens is that an insurance agent comes to a business owner and says, 'Hey, I can put this plan in place for you. You can make contributions to it. I’ll set it up so that your money goes into this nice life insurance policy and it will all be tax-deductible to you. Then at some point in the future, you can borrow the money back and not pay any taxes on it.'
    What people don't realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that they’re not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they're not going to allow it and that they're going to have to restate the income and pay taxes on it.

    Two big issues surrounding 419 schemes

    There are two big issues surrounding 419 schemes, according to Burgess – paying taxes on the plan and finding out that individuals and companies no longer have any rights in the policy. He explained each issue:

    Paying taxes. Although somebody has spent a great deal of money to set this thing up, the IRS tells them, 'No, this doesn’t work.' They now have to report the money they put into the policy as income and they owe the taxes on it. However, the policy’s got a big surrender charge on it and you can’t just take the money out of the policy to pay the taxes because there’s not enough available to you. That's a very big issue.
    No rights. The other issue is that once people get into these plans, they find out that the trust that was set up actually owns the policy, not the individual and not the corporation, and they no longer have any rights in that policy. So, they have to wait years and years and years to get anything back out.
    If you've been the victim of a fr



    Read more: http://employment-law.freeadvice.com/employment-law/pensions_benefits/big-problems-with-419-welfare-benefit-plans-funded-by-life-insurance.htm#ixzz46TSQzYXJ
    Under Creative Commons License: Attribution
    Follow us: @FreeAdviceNews on Twitter | freeadvice on Facebook

    ReplyDelete
  2. Companies who set up IRS Code Section 419 Welfare Benefit Plans that were funded by life insurance are finding they've got big problems. Although insurance agents told business owners that their contributions would be tax deductible, they're actually reportable transactions – which has left many companies owing taxes they simply can't pay.
    What is a 419 welfare benefit plan?

    A welfare benefit plan is effectively a corporate-sponsored insurance plan, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He explained, “A corporation sets up a trust to provide insurance benefits for its employees. That’s the basic concept behind it. The corporation's contributions into the trust are tax-deductible and many of these plans allow you to pick and choose which employees you want involved in the plan.”

    Abuses with plans funded with life insurance

    Burgess says that while not all of these plans bad, the ones that are bad are very abusive – and those generally happen with plans that are funded with life insurance and that are commission-driven. He told us:

    Basically what happens is that an insurance agent comes to a business owner and says, 'Hey, I can put this plan in place for you. You can make contributions to it. I’ll set it up so that your money goes into this nice life insurance policy and it will all be tax-deductible to you. Then at some point in the future, you can borrow the money back and not pay any taxes on it.'
    What people don't realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that they’re not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they're not going to allow it and that they're going to have to restate the income and pay taxes on it.

    Two big issues surrounding 419 schemes

    There are two big issues surrounding 419 schemes, according to Burgess – paying taxes on the plan and finding out that individuals and companies no longer have any rights in the policy. He explained each issue:

    Paying taxes. Although somebody has spent a great deal of money to set this thing up, the IRS tells them, 'No, this doesn’t work.' They now have to report the money they put into the policy as income and they owe the taxes on it. However, the policy’s got a big surrender charge on it and you can’t just take the money out of the policy to pay the taxes because there’s not enough available to you. That's a very big issue.
    No rights. The other issue is that once people get into these plans, they find out that the trust that was set up actually owns the policy, not the individual and not the corporation, and they no longer have any rights in that policy. So, they have to wait years and years and years to get anything back out.
    If you've been the victim of a fr



    Read more: http://employment-law.freeadvice.com/employment-law/pensions_benefits/big-problems-with-419-welfare-benefit-plans-funded-by-life-insurance.htm#ixzz46TSQzYXJ
    Under Creative Commons License: Attribution
    Follow us: @FreeAdviceNews on Twitter | freeadvice on Facebook

    ReplyDelete