Solving the 419 Plan Puzzle



Not all 419 plans are created equally, or have the same legal standing

Don’t you suspect that if you could afford the best accountants, you, too, would be privy to the tax-saving secrets reserved for the business elite? Aren’t you just a little intrigued by promoters who will reveal their unique and highly effective tax-reduction technique only after you sign an agreement not to reveal the details to others? Your clients are just as curious.Tax loopholes are based on an interpretation of our complex and often undecipherable Internal Revenue Code. The more popular the technique, the more it catches the attention of the IRS–and the more likely the law will be changed to curb abuse. Some promoters who have built businesses on these techniques may protest, claiming their particular arrangement is not affected by the new tax regulations. More prudent tax planners will adapt their programs or move on to other types of tax shelters.The 419 welfare benefit plan is a tax planning technique currently experiencing an evolution. Knowing its history and what is different today will help you make better recommendations to your clients.

Welfare Benefit Plans of the Past

One of the more popular tax reduction techniques of the last couple of decades was the multiple employer welfare benefit plan. Better known as the 419 plan, this tax shelter was particularly attractive to owner/employees who were worried about taxes and their retirement security. For the small business, the 419 plan promised unlimited tax deductions for benefits reserved for favored employees, including the owner. On paper, the plan was limited to medical, disability, death, or involuntary termination (severance) benefits. But in reality, the 419 plan promised retirement benefits for owners of S corporations and other pass-through tax entities that had little opportunity for deferred compensation or other fringe benefits.

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