A Rose By Any Other Name, or Whatever Happened to All Those 419A Providers?

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By Ronald H. Snyder, JD, MAAA, EA
and
Lance Wallach, CLU, ChFC, CIMC

For years promoters of life insurance companies and agents have tried to find ways of claiming that the premiums paid by business owners were tax deductible. This allowed them to sell policies at a “discount”. The problem became especially bad a few years ago with all of the outlandish claims about how §419A(f)(5) and 419A(f)(6) exempted employers from any tax deduction limits. Many other inaccurate statements were made as well, until the IRS finally put a stop to such assertions by issuing regulations and naming such plans as “potentially abusive tax shelters” (or “listed transactions”) that needed to be disclosed and registered. This appeared to put an end to the scourge of such scurrilous promoters, as such plans began to disappear from the landscape.

And what happened to all the providers that were peddling §419A(f)(5) and (6) life insurance plans a couple of years ago? We recently found the answer: most of them found a new life as promoters of so-called “419(e)” welfare benefit plans.

We recently reviewed several §419(e) plans, and it appears that many of them are nothing more than recycled §419A(f)(5) and §419A(f)(6) plans.

The “Tax Guide” written by one vendor’s attorney is illustrative: he confuses the difference between a “multi-employer trust” (a Taft-Hartley, collectively-bargained plan), a “multiple-employer trust” (a plan with more than one unrelated employer) and a “10-or-more employer trust” (a plan seeking to comply with IRC §419A(f)(6)).

Background: Section 419 of the Internal Revenue Code

Section 419 was added to the Internal Revenue Code (“IRC”) in 1984 to curb abuses in welfare benefit plan tax deductions. §419(a) does not authorize tax deductions, but provides as follows: “Contributions paid or accrued by an employer to a welfare benefit fund * * * shall not be deductible under this chapter * * *.”. It simply limits the amount that would be deductible under another IRC section to the “qualified cost for the taxable year”.

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