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MarZDoates

419A Plan - When does benefit become taxable

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I'm not sure if this is the correct board, and I know nothing about this topic. Please forgive me if I sound dense:

Doctor contributed appx $100,000 to a "welfare plan" (using a life insurance policy as the funding vehicle) for which he took tax deductions. He is now wanting to surrender the policy for it's surrender value (appx $70,000)

Question: Is the surrender value taxable to him as income?

Thanks.

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1. Read Notices 2007-83 and 2007-84.

2. The doctor is participating in a listed transaction and has until today (1/15/08) to file form 8886 (Reportable Transaction Disclosure Statement) to avoid gargantuan penalties.

3. He doesn't own his insurance policies, the trust does. He therefore cannot surrender the policy, only the trustee can.

4. If the trustee surrenders the policy it will be taxable to the extent that the surrender value exceeds the trust's basis in the policy.

5. If the trustee distributes the insurance proceeds to the doctor, it will definitely be taxable. However, as provided in Notice 2007-84, it may be treated as a dividend (subject to double taxation), as a non-qualifying distribution from a deferred compensation plan (subject to ordinary income taxes plus a 20% excise tax), as a disqualified benefit from a welfare benefit plan (subject to a 100% excise tax), etc.

6. Under the same Notice 20007-84, anyone who "promotes" or "aids and abets" the doctor with this abuse (distribution from a welfare benefit plan other than upon a welfare benefit occurrence) may be subjected to penalties under IRC sections 6700 and/or 6701.

Very scary.

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Yikes! That IS scary. Sounds like he should go back to the people that "sold" it to him! Thanks so much for this very useful information!!!

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I have another question....

We were looking at the instructions for the 8886 and it said to file with the employer's tax return (3/15 in this case). Can you please tell me where the 1/15/08 due date is coming from? Thanks!!!

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