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Irs Goes For Death Blow Against Abusive Welfare Benefit Plans


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Does IRS hate all welfare benefit plans? No, but they apparently have a serious bias against those plans purporting to comply with IRC section 419A(f)(6). In a pair of moves recently IRS has acted to eliminate such arrangements. In Notice 2000-15 and Notice 2001-51, IRS published its view that such arrangements are “potentially abusive tax shelters”. As such, participation in such arrangements must be reported to IRS on an attachment to the tax return of the corporation participating in such an arrangement.

Under new regulations, the disclosure requirements apply to individuals who participate in such arrangements, and the tax effect test of Notice 2000-15 has been eliminated, thus requiring all such arrangements to be disclosed. In addition, proposed regulations promulgated under IRC section 419A(f)(6) (finally!) have closed the door on variations between employers and products.

The proposed regulations rehash the requirements of section 419A(f)(6) and add the following additional requirements: (1) plan document must require the Administrator to maintain records verifying compliance with section 419A(f)(6), and (2) the IRS and participating employers (or their representatives) must have the right to examine and copy all such records.

In one new position the IRS claims that all life insurance premiums must be based on current age, thus eliminating both individual term and cash value life insurance policies. And in a laughable position, IRS, in one of the examples, claims that life insurance cash values are the reason that renewal premiums are lower than initial premiums. The examples demonstrate IRS’s view that the only benefits that comply with the proposed regulations are those that could be provided and tax-deducted without section 419A(f)(6).

While Congress apparently meant to leave the door open for something under section 419A(f)(6), IRS means to close it to everything. Do the Committee Reports under 419A(f)(6) say anything about “tax shelters”? No, they speak about multiple-employer welfare benefits plans and the conditions under which Congress intended to authorize them. Apparently Congress forgot to check with IRS first.

The irony is that as far as the new “blunderbuss” regulations and Notices go in attempting to curtain abusive arrangements, their efforts will have little effect in the marketplace. The Notices and regulations do not address abusive arrangements purporting to exist under IRC section 419A(f)(5), so those promoters of former 419A(f)(6) arrangements will simply change the Code section to 419A(f)(5) and enter into an agreement with (bribe?) a union to jointly sponsor such a plan. Although IRS may argue that such arrangement is “similar to” 419A(f)(6) plans, opinion letters are already being provided that assure the public that such arrangements are “substantially dissimilar to those” potentially abusive tax shelters existing under 419A(f)(6).

The Bush administration’s IRS used all their ammo to eliminate a varmint once and for all, but like the elusive Osama bin Ladin, abusive welfare benefit arrangements will simply move and take another form.

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