However beat up section 419 has been over the last decade, a victory — or should I say “a stunning victory” — recently took place in court. The ruling was in favor of the taxpayer who set up a 419 plan in Pinn v. Commissioner Doc Nos. 767-07 (Feb. 11, 2013).
A "welfare benefit" or 419 plan is an employee benefit other than those to which IRC sections 83(h), 404 and 404A apply. The most common types of welfare benefits are medical, dental, disability, severance and life insurance benefits. It is important to remember that an examination of an employer’s deduction for its contribution to a welfare benefit fund is not an examination of the trust itself. The actual examination of a VEBA trust itself must be handled by an agent from the Tax Exempt and Government Entities division.
There are many closely held businesses claiming deductions for contributions to welfare benefit funds that claim to be exempted from the deduction limitations of sections 419 and 419A because they meet the requirements of sections 419A(f)(5) (for separate funds under collective bargaining agreements) or 419A(f)(6) (for 10 or more employer plans). In 1995, the IRS issued Notice 95-34, warning taxpayers about potential problems with promoter claims regarding 10 or more employer plans. In 2000, the Service issued Notice 2000-15, classifying such arrangements as abusive corporate tax shelters.
The Treasury issued proposed regulations covering 10 or more employer plans on July 11, 2002. A frequently cited tax court case involving such plans, Neonatology Associates, P.A., et al., v. Commissioner, 115 T.C 43 (2000) aff’d 299 F. 3d 221 (3rd Cir. 2002), found that the majority of the contributions to one such plan were actually constructive dividends and thus nondeductible to the corporation, and they are currently includible in the shareholder’s income. The court upheld the Service’s imposition of penalties on both the corporate and individual entities. Since promoters of these arrangements tend to promise business owners current deductions for benefits to be received in the future, we expect that the popularity of these products will increase if Congress enacts tax legislation prospectively reducing the individual federal income tax rates. For more information on the types of plans being marketed, you can go to any Internet search engine and search the terms: welfare benefit funds, VEBA, section 419A(f)(6) or section 419A(f)(5).
Technicalities
In general, sections 419 and 419A limit an employer’s deduction for contributions to a welfare benefit fund to the amount of the benefits actually paid during the year by the fund (determined using the cash-basis method of accounting), plus a limited allowance for reserves for incurred-but-unpaid claims and post-retirement medical and life insurance benefits. Section 419A(c)(1) allows a limited reserve for incurred-but-unpaid claims for disability, medical, SUB or severance pay, and life insurance benefits.
However beat up section 419 has been over the last decade, a victory — or should I say “a stunning victory” — recently took place in court. The ruling was in favor of the taxpayer who set up a 419 plan in Pinn v. Commissioner Doc Nos. 767-07 (Feb. 11, 2013).
ReplyDeleteA "welfare benefit" or 419 plan is an employee benefit other than those to which IRC sections 83(h), 404 and 404A apply. The most common types of welfare benefits are medical, dental, disability, severance and life insurance benefits. It is important to remember that an examination of an employer’s deduction for its contribution to a welfare benefit fund is not an examination of the trust itself. The actual examination of a VEBA trust itself must be handled by an agent from the Tax Exempt and Government Entities division.
There are many closely held businesses claiming deductions for contributions to welfare benefit funds that claim to be exempted from the deduction limitations of sections 419 and 419A because they meet the requirements of sections 419A(f)(5) (for separate funds under collective bargaining agreements) or 419A(f)(6) (for 10 or more employer plans). In 1995, the IRS issued Notice 95-34, warning taxpayers about potential problems with promoter claims regarding 10 or more employer plans. In 2000, the Service issued Notice 2000-15, classifying such arrangements as abusive corporate tax shelters.
The Treasury issued proposed regulations covering 10 or more employer plans on July 11, 2002. A frequently cited tax court case involving such plans, Neonatology Associates, P.A., et al., v. Commissioner, 115 T.C 43 (2000) aff’d 299 F. 3d 221 (3rd Cir. 2002), found that the majority of the contributions to one such plan were actually constructive dividends and thus nondeductible to the corporation, and they are currently includible in the shareholder’s income. The court upheld the Service’s imposition of penalties on both the corporate and individual entities. Since promoters of these arrangements tend to promise business owners current deductions for benefits to be received in the future, we expect that the popularity of these products will increase if Congress enacts tax legislation prospectively reducing the individual federal income tax rates. For more information on the types of plans being marketed, you can go to any Internet search engine and search the terms: welfare benefit funds, VEBA, section 419A(f)(6) or section 419A(f)(5).
Technicalities
In general, sections 419 and 419A limit an employer’s deduction for contributions to a welfare benefit fund to the amount of the benefits actually paid during the year by the fund (determined using the cash-basis method of accounting), plus a limited allowance for reserves for incurred-but-unpaid claims and post-retirement medical and life insurance benefits. Section 419A(c)(1) allows a limited reserve for incurred-but-unpaid claims for disability, medical, SUB or severance pay, and life insurance benefits.