Some 419 Insurance coverage Welfare Profit Plans Proceed To Get Accountants Into Hassle

Lance Wallach | Aug 2, 2010

Standard so-called “419 Insurance coverage Welfare Profit Plans”, bought by most insurance coverage professionals, are getting accountants and their purchasers into an increasing number of bother. A CPA who’s approached by a shopper about one of many abusive preparations and/or conditions to be described and mentioned on this article should train the utmost diploma of warning, not solely on behalf of the shopper, however for his/her personal good as properly. The penalties famous on this article can be utilized to practitioners who put together and/or signal returns that fail to correctly disclose listed transactions, together with these mentioned herein.

On October 17, 2007, the IRS issued Discover 2007-83, Discover 2007-84, and Income Ruling 2007-65. Discover 2007-83 basically lists the traits of welfare profit plans that the Service regards as listed transactions. Put merely, to be a listed transaction, a plan can not depend on the union exception set forth in IRC Part 419A(f)(5),there should be money worth life insurance coverage throughout the plan and extreme tax deductions for all times insurance coverage, in extra of what could also be permitted by Sections 419 and 419A, should have been claimed.

In Discover 2007-84, the Service expressed concern with plans that present all or a considerable portion of advantages to house owners and/or key and extremely compensated staff. The discover recognized quite a few particular issues, amongst them:

1. The granting of loans to contributors

2. Offering deferred compensation

3. Plan terminations that end result within the distribution of property quite than getting used post-retirement, as initially established.

4. Allowing the switch of life insurance coverage insurance policies to contributors.

Various tax remedy might be within the offing for such preparations, because the IRS intends to re-characterize such preparations as dividends, non-qualified deferred compensation (beneath IRC Part 404(a)(5) or Part 409A), split-dollar life insurance coverage preparations, or disqualified advantages pursuant to Part 4976. Taxpayers collaborating in these listed transactions ought to have, most often, already disclosed such participation to the Service. Those that haven’t ought to accomplish that on the earliest potential second. Failure to reveal can lead to extreme penalties – as much as $100,000 for people and $200,000 for companies.

Lastly, Income Ruling 2007-65 centered on conditions the place money worth life insurance coverage is bought on proprietor staff and different key staff, whereas solely time period insurance coverage is obtainable to the rank and file. These are bought as 419(e), 419A (f)(6), and 419 plans. Life insurance coverage premiums usually are not inherently tax deductible and authority should be present in Part 79 to justify such a deduction. Part 264(a), in truth, particularly disallows tax deductions for all times insurance coverage, no less than in some instances. And furthermore, the Service declared, interposition of a belief doesn’t change the character of the transaction.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about monetary planning, retirement plans, and tax discount methods. He speaks at greater than 70 nationwide conventions yearly and writes for greater than 50 nationwide publications. For extra info and extra articles on these topics, go to www.taxadvisorexperts.org or name 516-938-5007.

The knowledge offered herein isn’t supposed as authorized, accounting, monetary or every other kind of recommendation for any particular particular person or different entity. You must contact an applicable skilled for any such recommendation.