Section 79 & 419 Plans Litigation: The Team Approach to Tax, Financial and Estate Pla...
Section 79 & 419 Plans Litigation: The Team Approach to Tax, Financial and Estate Pla...: by Lance Wallach CPAs are the best and most qualified professionals when it comes to serving their clients needs, but they need to know w...
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Topic: Audit Representation terminates, the cash value and other property in the trust is distributed to the then-existing employees. Due to the termination timing and trust allocations, it’s expected that a small amount of trust proceeds will go to the employees, while most of it will go to the business owners and key employees.
ReplyDeleteThe IRS doesn’t like these plans. That is why these sorts of arrangements typically do not satisfy the requirements of 26 USC § 419A(f)(6), and thus are not permitted tax deductions that the plan promoters claim business owners are entitled to.
Why not? IRS Notice 95-34 (http://www.irs.gov/pub/irs-tege/n-95-34.pdf) provides some of the reasons:
The arrangement is actually providing deferred compensation. An employer’s contributions to a non-qualified plan of deferred compensation are governed by §405(a)(5), which says that a deduction is permitted when the associated amount is included in the employer’s gross income.
The plan arrangements are, based on the facts, separate plans, which thus doe not satisfy the “10-or-more employer plan” exemption of 419A(f)(6).
The plan qualifies for § 419A(f)(6), but the employer’s contributions are deemed a non-deductible prepaid expense under a different IRC section.
A business owner with a so-called “419 plan” is subject to certain disclosure requirements found in 26 USC § 6111, and may also be subject to tax penalties.
Conclusion.
Recently, the IRS has specifically identified certain §419 and §419A plans that are prohibited. Competent legal counsel will be able to instruct you whether: (1) your plan is prohibited or permits deductions for employer contributions, and (2) whether you will be subject to penalties, and (3) the disclosure requirements.
If your business uses one of these plans, or you have sold one of these plans, due diligence should compel you to seek