419 Welfare Benefit Plans

By Lance Wallach, CLU, ChFC, CIMC

Welfare Benefit Plans (WBP), also known as Welfare Benefit Trusts and Welfare Benefit Funds are vehicles by which employers may offer their employees and retirees with certain types of insurance coverage (e.g., life insurance, health insurance, disability insurance, and long-term care), as well as other benefits such as severance payments and educational funding.

If properly designed and in compliance with IRC sections 419 and 419A, WBPs offer employers with a valid tax deduction. However, as is the case with many plans that offer opportunities for deductibility, some WBPs fail to comply with Code standards, invite abuse, and otherwise are used inappropriately as a basis to reduce taxable income.

It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.

The Good:

Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:

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