Retirement planning and tax deductions are being chiseled away by the IRS every year. Companies that are using 419(e) plans and VEBAs have been attacked by the IRS. The IRS has issued a multitude of Notices regarding the use of these plans and has listed them on the listed tax transaction list.
VEBAs and 419 Plans: Listed Tax Transaction
The IRS has issued notices that could significantly change how we all use voluntary employee beneficiary associations, also known as VEBAs, as well as how 419 plans are used. The 419 plans, for those who are not familiar with them, are designed for welfare benefits.
Both of these plans have been scrutinized by the IRS. Previously, there were reputable advisors who used third-party companies to administer plans designed to assist small business owners devise a plan that had solely death benefits. These plans would let the company receive deductions on taxes in order to pay for policies that had cash value life insurance and were owned by a 419(f)6 trust. With these policies, it was possible for a deceased employee to pass on the death benefit to heirs.
All of a sudden, things changed and new third-party administrators entered the industry. This resulted in more marketable plans to be created. It also helped with the collection of premiums that began to flow into plans that were considered to be abusive by many people.
The people who devised these new plans began to boast the changes publically and the IRS decided to take action by passing regulations that would stop the use of 419(f)6 and (5) plans. These regulations also stopped the use of VEBAs (employee beneficiary associations).
Despite the new regulations, some third-party administrators discovered that they could still implement these single employer VEBA plans because of omissions from Congress in which Congress did not include these particular plans when laws were passed to stop the multiple-employer VEBA plans. What happened was that these plans began to be abused like others and the IRS started to issue notices.
The IRS was clearly trying to state that employers who were implementing VEBAs and 419(e) plans would not be eligible to receive any corporate deduction for the money that would be used to pay for premiums on cash value life insurance policies. Since the majority of the plans were funded with cash value life insurance, this presented many problems. View Notice 2007-83, Notice 2007-84 by the IRS.
In regards to post-retirement medical benefits, wouldn�t the cash value insurance be able to be used to cover these benefits? The notices that were issued from the IRS stated that no, this could not occur and post-retirement benefits could not be funded in this manner.
The question is whether it is ok to purchase term life insurance in a plan. Notice 2007-65 seems to only focus on cash value life insurance and does not mention term life. The notice did state that if there was a case where the employer would not be able to deduct the premium for life insurance under Code 246(a)1 if there was no 419 or VEBA ‘trust’ involved, then no life insurance deduction could be taken at all as long as the premiums were in excess of the $50,000 coverage limit of Section 79 and that the premium was paid by the 419 or VEBA ‘trust’. This case remains even when the heir is assigned by the employee.
It would remain suitable for the employer to pay retirement medical expenses, but not through the use of VEBAs or 419 plans. The IRS seems to indicate that they did not want companies the VEBA or 419 to use cash value life insurance policies as a means to pay these benefits for retirees.
VEBAs and 419(e) Plans using Cash Value Life Insurance on Tax Listed Transaction
VEBAs and 419(e) plans were placed on the listed tax transaction list by the IRS should these plans buy cash value life insurance. The penalties that are issued for the non-disclosure of any tax listed transaction could range between $100,000 and $200,000.
IRS Notices have completely altered the way these plans can be used. Should an employer have a death benefit only plan or another plan in which the employee in the company will own the policy and assigns the death benefit to a trust, these individuals must be aware of the recent IRS changes. By ignoring these new regulations, fines could quickly amass.
The goal seems to be for the IRS to reduce the use of 419(e) and VEBA plans by single-employers.
Please contact Estate Street Partners if you wish for assistance on implementing a retirement plan to maximize your returns and reduce your taxes. Learn on how the Ultra Trust® can protect your assets from Medicaid, lawsuits and divorce.