Wednesday, August 13, 2014

Companies who set up IRS Code Section 419 Welfare Benefit Plans

Companies who set up IRS Code Section 419 Welfare Benefit Plans that were funded by life insurance are finding they've got big problems. Although insurance agents told business owners that their contributions would be tax deductible, they're actually reportable transactions – which has left many companies owing taxes they simply can't pay.
What is a 419 welfare benefit plan?

A welfare benefit plan is effectively a corporate-sponsored insurance plan, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He explained, “A corporation sets up a trust to provide insurance benefits for its employees. That’s the basic concept behind it. The corporation's contributions into the trust are tax-deductible and many of these plans allow you to pick and choose which employees you want involved in the plan.”

Abuses with plans funded with life insurance

Burgess says that while not all of these plans bad, the ones that are bad are very abusive – and those generally happen with plans that are funded with life insurance and that are commission-driven. He told us:

Basically what happens is that an insurance agent comes to a business owner and says, 'Hey, I can put this plan in place for you. You can make contributions to it. I’ll set it up so that your money goes into this nice life insurance policy and it will all be tax-deductible to you. Then at some point in the future, you can borrow the money back and not pay any taxes on it.'
What people don't realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that they’re not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they're not going to allow it and that they're going to have to restate the income and pay taxes on it.

Two big issues surrounding 419 schemes

There are two big issues surrounding 419 schemes, according to Burgess – paying taxes on the plan and finding out that individuals and companies no longer have any rights in the policy. He explained each issue:

Paying taxes. Although somebody has spent a great deal of money to set this thing up, the IRS tells them, 'No, this doesn’t work.' They now have to report the money they put into the policy as income and they owe the taxes on it. However, the policy’s got a big surrender charge on it and you can’t just take the money out of the policy to pay the taxes because there’s not enough available to you. That's a very big issue.
No rights. The other issue is that once people get into these plans, they find out that the trust that was set up actually owns the policy, not the individual and not the corporation, and they no longer have any rights in that policy. So, they have to wait years and years and years to get anything back out.

1 comment:

  1. It is really bad situation with insurance in our country. I think that all these companies work not for people but just for money. I thought that in case of any accident I could be sure that my insurance would help me and I could pay bills with the money. As I understand from your article it will be better if I will get easy money loan and use the money for my needs in this case. I’m afraid that we can't trust anyone in the world. It is really sad. I hope that this situation will change in the future.

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