| While many business owners adopt legitimate | | | | 419 Plans that are in disfavor with the IRS are those |
| Voluntary Employee Beneficiary Associations | | | | plans that claim to be in compliance with Internal |
| ("VEBAs"), welfare benefit plans ("419(e) plans"), and | | | | Revenue Code Sections 419A(f)(5) or |
| fully insured defined benefit pensions ("412(i) plans"), | | | | 419A(f)(6).So-called Section 419A(f)(5) plans are |
| all of the foregoing plans are also marketed as a way | | | | marketed as "union" plans. Some of these use |
| for owners to obtain huge tax deductions, with the | | | | convincing language to persuade employers that they |
| ability to take money out of a corporation tax free, | | | | are able to include only key employees and |
| protect assets from creditors, deduct life, health, | | | | owner-employees in their "union," and to provide such |
| disability, and long-term care insurance premiums, as | | | | "union members" with an inviting array of |
| well as pass wealth tax free to the next generation. | | | | benefits.Section 419A(f)(6) plans, also called |
| This article will explore those representations.We | | | | "10-or-more employer plans", are marketed as |
| have worked with each of these benefit plans for | | | | exempt from tax deduction limitations altogether. |
| years without problems for ourselves or for our | | | | Some such plans even claim to be exempt from |
| clients. Yet a review of recent Internal Revenue | | | | nondiscrimination requirements. It appears that IRS |
| Service ("IRS") rulings and court cases instituted both | | | | succeeded in eliminating most of these plans.412(i) |
| by the IRS as well as the Department of Labor | | | | Fully Insured Defined Benefit Plans412(i) plans |
| ("DOL") shows that some taxpayers adopting | | | | continue to generate both interest and caution |
| VEBAs, 419 plans, or 412(i) plans have had tax | | | | following recent Internal Revenue Service and |
| deductions disallowed, been sued, or even worse. | | | | Treasury Department actions to crack down on a |
| Many plans have been determined by IRS to be | | | | number of abusive schemes that had cropped up in |
| "listed transactions" (or potentially abusive tax | | | | this marketplace.Unlike 401(k) and other defined |
| shelters), requiring notifying the Service and the | | | | contribution plans, defined benefit plans, including |
| possibility of substantial penalties.When the various | | | | 412(i) plans, are not subject to the $42,000 |
| plans are sold and operated properly, they can be | | | | contribution limit ($46,000 with catch up salary |
| very advantageous. However, rather than brave the | | | | deferrals).Maximum contributions to a defined benefit |
| regulatory minefield, many accountants and advisors | | | | plan may far exceed 100% of compensation. (We |
| would rather simply just say "no". How can a | | | | have seen cases where tax deductible contributions |
| non-specialist differentiate between a legitimate plan | | | | in excess of $200,000 per year for a single |
| and one that IRS or DOL may attack?VEBAs and | | | | participant were available.) For example, a W-2 wage |
| 419(e) PlansVEBAs and 419(e) plans potentially | | | | of $50,000 would permit a maximum SEP-IRA |
| provide a triple tax benefit: (i) actuarially determined | | | | contribution of $12,000 for a person of fifty but will |
| contributions to a legitimate VEBA or other welfare | | | | allow a 412(i) contribution of over $75,000!Defined |
| benefit plan may be tax deductible (ii) investment | | | | benefit plans (including 412(i) plans) have tremendous |
| income may accumulate tax-deferred, and (iii) | | | | appeal for small, closely held businesses that are |
| benefits paid from the plan can be distributed income | | | | profitable and have few, if any, employees. The initial |
| tax free, either as life insurance proceeds or for | | | | tax-deductible contributions and projected benefits |
| health care expense reimbursement benefits If | | | | are unparalleled for participants age 40 and older. But |
| properly designed and established, the benefits inside | | | | care must be exercised to assure that a 412(i) or |
| the plan are protected from creditors and the death | | | | other defined benefit plan is properly designed and |
| benefits may be excluded from the participant's | | | | funded. We have seen plans offering tax deductible |
| estate for estate tax purposes. Look out for plans | | | | contributions of $800,000 in a single year! If it looks |
| that offer benefits that appear too good to be true: | | | | to good to be true it probably is.Properly structured |
| tax deductible contributions and tax free retirement | | | | 412(i) plans are viable when avoiding the pitfalls and |
| benefits, severance benefits for the business owner, | | | | can provide maximum tax deductions and retirement |
| etc.419A(f)(5) and (6) PlansOver the past few years, | | | | benefits.Matthew Tuttle is the author of "Financial |
| the Treasury and the IRS have acted forcefully to | | | | Secrets of my Wealthy Grandparents". |
| eliminate so-called "Section 419 plans". The Section | | | | |