How to Beat the IRS Tips and tricks to help you with your taxes and other IRS needs. All correspondences are held in strict confidence!
EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
Notice 95-34 discusses TAX PROBLEMS raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple EMPLOYER welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A. There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund. IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all EMPLOYERS, and the plan must not be experience rated with respect to individual EMPLOYERS. Promoters have offered trust arrangements that are used to provide LIFE INSURANCE, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions. Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses). On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
What is a Section 79 Plan? It depends on who you ask. If you ask an insurance company that offers these plans or an insurance agent that sells them, they will tell you that they are one of the last “tax-favorable” wealth building tools a business owner can use to grow their wealth.
If you ask me what a Section 79 Plan is, I’ll tell you that it’s one of the most over-sold and over-abused life insurance sales gimmicks in the insurance industry. Business owners can grow more wealth NOT using these plans (something you’ll never hear from an insurance agent pitching them).
Who is the ideal client for an insurance agent to pitch this plan to? A profitable small business who has an owner that would like an additional “tax-deductible” wealth building tool to use for retirement (so the market is large).
The sales pitch—Business owner, how you like to fund a plan that…
…allows your money to grows tax-free and where the money can be removed tax free in retirement (unlike a qualified plan where the money coming out is fully taxable)?
…is 30-40% deductible through your business?
…has limited expenses for employees?
Sound great right? Sure, if you don’t know the “real” math and pitfall to these plans.
That’s why I created this site. I wanted consumers and advisors alike learn in a “full-disclosure” manner the problems with Section 79 Plans.
After you learn about the problems with Section 79 Plans, I think, like me, you’ll come to the conclusion that the best course of action is to avoid these plans altogether.
Why You Should Stay Away From Section 79 Life Insurance Plans!
How to Beat the IRS
ReplyDeleteTips and tricks to help you with your taxes and other IRS needs. All correspondences are held in strict confidence!
EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
Notice 95-34 discusses TAX PROBLEMS raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple EMPLOYER welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A. There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund.
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all EMPLOYERS, and the plan must not be experience rated with respect to individual EMPLOYERS.
Promoters have offered trust arrangements that are used to provide LIFE INSURANCE, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
ReplyDeleteWhat is a Section 79 Plan? It depends on who you ask.
If you ask an insurance company that offers these plans or an insurance agent that sells them, they will tell you that they are one of the last “tax-favorable” wealth building tools a business owner can use to grow their wealth.
If you ask me what a Section 79 Plan is, I’ll tell you that it’s one of the most over-sold and over-abused life insurance sales gimmicks in the insurance industry. Business owners can grow more wealth NOT using these plans (something you’ll never hear from an insurance agent pitching them).
Who is the ideal client for an insurance agent to pitch this plan to? A profitable small business who has an owner that would like an additional “tax-deductible” wealth building tool to use for retirement (so the market is large).
The sales pitch—Business owner, how you like to fund a plan that…
…allows your money to grows tax-free and where the money can be removed tax free in retirement (unlike a qualified plan where the money coming out is fully taxable)?
…is 30-40% deductible through your business?
…has limited expenses for employees?
Sound great right? Sure, if you don’t know the “real” math and pitfall to these plans.
That’s why I created this site. I wanted consumers and advisors alike learn in a “full-disclosure” manner the problems with Section 79 Plans.
After you learn about the problems with Section 79 Plans, I think, like me, you’ll come to the conclusion that the best course of action is to avoid these plans altogether.
Why You Should Stay Away From Section 79 Life Insurance Plans!