419 (welfare benefit) plans in jeopardy; severe agent penalties Have recent IRS rulings killed the welfare benefit plan? By Lance Wallach, CLU, ChFC, CIMC Phone: (516) Fax: (516)

Insurance agents often sell ways to deduct life insurance premiums This is usually done in 419 plans Most of these deductions are disallowed on audit Notice was issued on 10/17/2007 It identified certain trust arrangements involving cash value life insurance as listed transactions

Revenue Ruling was issued simultaneously It is now clear that an employer cannot claim deductions for cash value life insurance inside of 419 plans Persons participating in a listed transaction have disclosure obligations They must file Form 8886 with their tax returns

Failure to file and disclose results in penalties of up to $200,000 These penalties can also be imposed upon agents, advisors, and other professionals Taxpayers who otherwise would be required to file a disclosure statement prior to Jan. 15, 2008, as a result of Notice have until Jan. 15, 2008, to make the disclosure Revenue Ruling has the same target as Notices and

The target is those arrangements where cash value life insurance is purchased on employees who are owners of the business Sometimes it is also purchased on key employees Term insurance is then purchased on the lives of other employees These plans are currently sold as 419(e), 419A(f)(6), or 419 plans

Sometimes they are sold as single employer plans It is anticipated that the plan will be terminated with the cash value policies being distributed to owners or key employees Little if anything goes to the other employees Promoters claim the insurance premiums are a current deduction The ruling makes it absolutely clear that this is not the case

A business clearly cannot deduct the cost of premiums paid through a 419 (welfare benefit) plan for cash value life insurance The ruling also describes arrangements that may be listed transactions These plans are usually sold by insurance agents and financial planners They are also sometimes sold by CPAs and attorneys

There are many reasons why the IRS may challenge the claimed tax benefits of these arrangements Benefits provided only to owner-employees or key employees may not be tax deductible and may, in addition, be subject to the Section percent excise tax Where property, including life insurance policies, is not properly valued, the IRS will challenge the value

In a proper arrangement, deductions are limited by IRC Sections 419 and 419A Depending on facts and circumstances, the rules for split-dollar arrangements may apply Again depending on facts and circumstances, contributions on behalf of an owner-employee may be characterized as dividends or as deferred compensation pursuant to IRC 404(a)(5) or 409A, or both

Be especially cautious with any 419 plan, for both yourself and the client The Government has the names of most former 419 A(f)(6) promoters, as many current 419 promoters were This leads to increased scrutiny of such promoters, making audits far riskier and more likely

More on listed transactions Listed transactions are those deemed by the IRS to be structured for the significant purpose of tax avoidance or evasion Participants in listed transactions must attach Form 8886 to their tax returns There are severe penalties for failure to file Form 8886 disclosing such participation There are also severe penalties for those who aid and abet participation in listed transactions

See IRS Announcement for a complete explanation of listed transactions Current Listed Transactions offers the most recent of listed transactions See Treasury Regulations Section for the law regarding reportable transactions

Lance Wallach, CLU, ChFC, CIMC Phone: (516) Fax: (516)