Some 419 Insurance Welfare Benefit Plans Continue To Get Accountants Into Trouble

by Lance Wallach


Published in The Finance Toolbox


Popular so-called “419 Insurance Welfare Benefit Plans," sold by most insurance professionals, are getting accountants and their clients into more and more trouble. A
CPA who is approached by a client about one of the abusive arrangements and/or
situations to be described and discussed in this article must exercise the utmost degree of
caution, not only on behalf of the client, but for his/her own good as well. The penalties
noted in this article can also be applied to practitioners who prepare and/or sign returns
that fail to properly disclose listed transactions, including those discussed herein.

On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue
Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit
plans that the Service regards as listed transactions. Put simply, to be a listed transaction,
a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5),there must
be cash value life insurance within the plan and excessive tax deductions for life
insurance, in excess of what may be permitted by Sections 419 and 419A, must have
been claimed.

In Notice 2007-84, the Service expressed concern with plans that provide all or a
substantial portion of benefits to owners and/or key and highly compensated employees.
The notice identified numerous specific concerns, among them:

1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-
retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.

Alternative tax treatment may well be in the offing for such arrangements, as the IRS
intends to re-characterize such arrangements as dividends, non-qualified deferred
compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance
arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating
in these listed transactions should have, in most cases, already disclosed such
participation to the Service. Those who have not should do so at the earliest possible
moment. Failure to disclose can result in severe penalties – up to $100,000 for
individuals and $200,000 for corporations.

Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is
purchased on owner employees and other key employees, while only term insurance is

offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life
insurance premiums are not inherently tax deductible and authority must be found in
Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax
deductions for life insurance, at least in some cases. And moreover, the Service declared,
interposition of a trust does not change the nature of the transaction.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial
planning, retirement plans, and tax reduction strategies. He speaks at more than 70
national conventions annually and writes for more than 50 national publications. For
more information and additional articles on these subjects, visit
www.taxadvisorexperts.org or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.