1 comment

I was really pleased. I had what the IRS seems to call a listed transaction.

That's a transaction that the IRS finds to be abusive. But I was sold the vehicle without actually understanding this (horrible broker and not so knowledgeable accountant ...that will be another post) So I took a chance and actually contacted someone who seems to be all over the internet and he helped me when no one seemed to be able to help me.

I got away without the heavy fine that I thought I would have to pay. Saved me thousands and thousands....His name is Lance Wallach and I totally recommend him.

Do You Have Something To Say ?
Write a review


Terms of Service
Post Comment
Plainview, New York, United States #614113

Be careful of abusive 419(e) welfare benefit plans


Life insurance agents and companies have always tried to find ways of making costs paid by business owners tax deductible.

The situation became ridiculous a few years ago with outrageous claims about how Sections 419A(f)(5) and (6) of the Internal Revenue Code exempted employers from any tax-deduction limitations. Finally, the Internal Revenue Service put a stop to such egregious misrepresentations in 2002 by issuing regulations and naming such plans as "potentially abusive tax shelters" (or "listed transactions") that needed to be registered and disclosed to the IRS.

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

IRC Section 419(e) provides a definition of the term "welfare benefit fund" and provides that it includes a trust or "organization described in paragraph 7, 9, 17 or 20 of Section 501(c)" or any taxable trust that provides welfare benefits. Reference to IRC Section 419(e) is, therefore, unnecessary.

So, what are 419(e) plans?

We recently reviewed several so-called Section 419(e) plans. Many of them are nothing more than recycled Section 419A(f)(5) and (6) plans. Now, many of the same promoters simply claim that a life insurance policy is a welfare benefit plan and therefore tax-deductible because it uses a single-employer trust, rather than a "10-or-more-employer plan." Many plans incorrectly purport to be exempt from ERISA, from Code Sections 414, 105, 505, 79, 4975, etc.


Vendors commonly claim that contributions to their plan are tax-deductible because they fall within the limitations imposed under IRC Section 419; however, Sec. 419 is simply a limitation on tax deductions. The deductions themselves must be claimed under enabling sections of the IRC. Many fail to do so. Others claim that the deductions are ordinary and necessary business expenses under Sec. 162, citing Regs. Sec. 1.162-10 in error: There is no mention in that section of life insurance or a death benefit as a welfare benefit.

Some plans claim to impute income for current protection under the PS 58 rules. However, PS 58 treatment is available only to qualified retirement plans and split-dollar plans. (None of the 419(e) plans claim to comply with the split-dollar regulations.)

Recently, many accountants have been calling us for help. The IRS is sending audit letters to participants in some of the 419 plans. It has identified many of the 419 promoters, and demanded a listing of the names of companies in the plans.

Here's the problem that most promoters ignore: On April 10, 2007, the IRS issued final regulations under Sec. 409A of the IRC that made it crystal-clear that most of the so-called "419(e)" plans are in violation of the law and subject to hefty penalties, because they provide deferred compensation without complying with Sec. 409A.


Section 409A does not apply to welfare benefits. In fact, several forms of welfare

Be careful of abusive 419(e) welfare benefit plans

(continued from page 1)

By Lance Wallach and Ronald H. Snyder

benefits are specifically excluded under Sec. 409A. However, such excluded arrangements do not permit transfer of property to the participant except for death, disability and payments made upon retirement in accordance with the Section 409A rules.

Most of the existing Sec. 419(e) and 419A(f)(6) welfare benefit plans do not comply with the Sec. 409A rules relative to transfers of insurance policies or cash payments other than upon death.

What does this mean for advisors? Under Circular 230 standards, a CPA or attorney who advises their client about participating in a non-compliant welfare benefit plan may be liable for fines and other sanctions. We expect that opinion letters relative to such plans have either been withdrawn or will be shortly. We admonish professionals carefully to review all communications with clients relative to such plans. The IRS has recently been successful in imposing huge fines on several law firms for blessing questionable transactions.


Time is of the essence in making and implementing a decision as to what to do. We

have only seen one or two plans that may be in compliance. We therefore recommend that employers waste no time in contacting a tax professional to review their welfare benefit plan participation to verify compliance with the new law and regulations. Do not take the promoter's word that his plan is in compliance; odds are it is not.


Lance Wallach, CLU, ChFC, speaks and writes extensively about financial planning, retirement plans and tax reduction strategies, and is the author of Bisk Education's CPAs' Guide to Life Insurance. Reach him at www.vebaplan.com or (516) 938-5007. Ronald H. Snyder, JD, EA, is an ERISA attorney and enrolled actuary specializing in employee benefit plans.

Information contained in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for appropriate guidance with respect to tax matters.

You May Also Like