Watch out because the IRS is watching, and it often says that the plan is too good to be true.
A 419 Welfare Benefit Plan is generally a plan set up in the form of a trust to provide certain benefits to the employees of a company. You will notice that the term trust is used because the large whole life insurance policies that the owner is instructed to buy go into a trust where neither the company nor the business owner actually owns them. The trust owns the policies.
The insurance agent or CPA wants you to set up a 419(e) plan because you are agreeing to buy high dollar life insurance with premiums payable until you retire. That can generate fees of up to 125% of the first year premium as a commission – that’s right; you read that correctly – 125%.
The plan is sold as a win-win for everyone. It is for the insurance company because it locks the business owner into long-term, expensive insurance. It is for the trust administrator (remember: the insurance policies must be put into a trust to make the plan work) because the business owner has to pay a fee every year to administer the plan. But for the business owner? Maybe not so much!
The big sales pitch often is that the contributions are tax deductible to the business and the business can exclude employees. Moreover, the seller promises that the big insurance policies that are paid for with tax free money can be cashed out or transferred from the trust to the business owner at some later date without paying taxes. It is all so easy: no taxes in and no taxes out. Good right?
Unfortunately, it is often too good to be true. The IRS has been actively attacking such 419 Welfare Benefit Plans as TAX SHELTERS. If a transaction is classified as a tax shelter then the salesperson and your CPA are supposed to tell you to file an 8886 form which highlights tax shelters to the IRS. Think of it as a beacon so that the IRS knows who to come pursue for taxes, penalties, interest and listed transaction charges.
The IRS focus on 419(e) plans came up in a case identified as Curcio v. Commissioner of Internal Revenue, T.C. Memo 2010-115.
The end result was a financial disaster for the company that took the ordinary business deductions for the plan and the individual taxpayers that also took deductions on their personal taxes.
If something goes wrong on one of these plans (as it often does) who does the business owner look to? The insurance company will claim in defense that it simply sold insurance. The agent or the CPA will claim that it was the responsibility of the third party administrator (TPA) to make sure that the plan was solid and lawful. The TPA will claim that the business owner is not the owner of the product and cannot sue because it was in a trust. The business owner is often left facing the IRS on his or her own while paying other professionals to correct the tax situation.
If you are a business person in a 419(e) plan you should contact Lance Wallach.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
