Friday, July 11, 2014

419 Plan

419 Plan

1 comment:

  1. "Welfare Benefit Plan" tax schemes are gaining popularity among sole proprietors about like crack cocaine, and they promise to be much more harmful to their health.

    As we all know, businesses that provide benefits to their employees, such as health care and insurance, write the costs of those welfare benefit programs off on their taxes. Welfare Benefit Plan tax schemes are promoted as a way for sole proprietors to do the same thing, providing their favorite employee (themselves) with cleverly crafted welfare benefits, writing the costs of those benefits off as tax deductions. So, as the scheme goes, you pump massive amounts of income into a cash value life insurance policy, deducting those premiums as a tax deduction, while building a cash value that you can later cash out, or borrow against, "tax free." The promoters of these schemes generally explain (with a wink and a nod) that when you begin to cash out, you have an obligation to report that money as income, because insurance policy proceeds are not generally taxable, and these withdrawals are not reportable by the issuer of the policy.

    In other words, these Welfare Benefit Plans are promoted to be like some special IRA that you can put all the money in you want, write the contributions off your taxes, and pull the money out later without any notification to the IRS . . . unless you tell them.

    Internal Revenue Code Sections 419, and 419A, define the rules allowing employers to make tax deductible contributions to Welfare Benefit Plans, in order to provide their employees with medical and life insurance benefits. There is nothing inherently wrong with these plans; the IRS acknowledges that businesses often maintain welfare benefit funds that fully comply with the intent of Sections 419 and 419A and, in fact, provide meaningful medical and life insurance benefits to their employees, making substantial contributions to those funds that the IRS accepts as fully deductible.

    On the other hand, the IRS does take issue with the Welfare Benefit Plans that are being promoted to sole proprietors and small businesses as a way to avoid federal income taxes via schemes that, in form, provide medical and life insurance benefits to key employees but, in substance, primarily serve to benefit the owner(s) of the businesses. These programs are sometimes referred to by their promoters as “single employer plans,” or “419 plans.” The promoters claim that the employers’ contributions are deductible under IRC Sections 419 and 419A as ordinary and necessary business expenses.

    The essence of the 419 Welfare Benefit Plan scam is the representation that a business owner can provide life insurance for himself as his own “favorite employee,” writing off the policy payments as a tax deductible business expense, while enjoying the benefit of the insurance, and accumulating cash value in the policy.

    They cannot -- PERIOD!

    Admittedly, the provisions of the Internal Revenue Code, and related case law, can be very difficult to understand, but evaluating the viability of this sort of tax scheme need not be that complicated. With regard to the assertion that sole proprietors can fund their own life insurance policies as a tax deductible business expense, there is no room for interpretation, discussion or debate. IRC 264(a)(1) says, “No deduction shall be allowed for premiums on any life insurance policy . . . if the taxpayer is directly or indirectly a beneficiary under the policy or contract.”

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