419 plans?

[Guest Christie Banks]

I have the same question that someone had a year ago that was never answered - are these 419 plans legitimate? I have a client who has been told they can deduct large sums of money put away for specific employees only. The sales brochures all say it is legit (along with an attorney's letter saying they will defend you to the IRS), but does anyone have a more objective opinion?

[KJohnson]

According to IRS representatives you should expect some 419A regs sometime in the near future (they emphasized this means near future in IRS terms). Those regs should clarify what is permissbile and what is not under these plans. From their comments it sounds like this guidance may be bad news to some of these plans.Here is the info from the regulatory agenda:

2481. ‡” SECTION 419A GUIDANCE

Priority: Substantive, Nonsignificant

Legal Authority: 26 USC 7805

CFR Citation: 26 CFR 419A

Legal Deadline: None

Abstract: This proposed regulation

provides special rules concerning

employer deductions for contributions

to employee welfare benefit funds.

Timetable:

Action Date FR Cite

NPRM 06/00/02

Regulatory Flexibility Analysis

Required: Undetermined

Small Entities Affected: No

Government Levels Affected: None

Additional Information: REG-165868-01

Drafting attorney: Betty J. Clary (202)

622-6080

Reviewing attorney: Mark Schwimmer

(202) 622-6080

Treasury attorney: Harlan Weller (202)

622-1001

CC:TEGE

Agency Contact: Betty J. Clary,

Attorney-Advisor, Department of the

Treasury, Internal Revenue Service,

1111 Constitution Avenue NW,

Washington, DC 20224

Phone: 202 622-6080

RIN: 1545–BA47

[mbozek]

I presume that you are thinking of the 419A plans for 10 or more employers which permit deductions in excess of the general 419A limits. There are a number of products on the market and every one comes with an opinion letter from counsel which no one reads for the caveats. One big restriction is that the sponsor/ marketer of the product does not guarantee that contributions will be deductible because it depends on the types of benefit provided, etc. These things are usually sold as a form of LI tax shelter to provide severance benefits ( which is actually deferred compensation which is not permitted) on a discriminatory basis. some products offer cash value LI to the owners and term life for the rank and file employees . There have been several cases where employers have had deductions disqualified. Also some of these programs are regarded as tax shelters which must be registered with the IRS who can ask for the list of employers who adopt the plans. There is no substitute for retaining knowledgeable counsel to review the program. The opinion letter merely says that the firm will defend the employer before the IRS but does not render an opinion as to whether the contributions will be deductible as a business expense( Check the fine print for the cost of representation). If the IRS prevails the employer will owe the tax plus interest and penalities. I would not wait for IRS prop. regs-- they have been coming since 1986.

[Guest Christie Banks]

That's exactly what I was wondering about. This one actually does not allow severance pay to be run through it, so in that sense it's not as much of a concern for being deferred compensation as it could be. The lawyer states in their letter that they will give an individual opinion for $5,000. I'll let the client decide whether it's worth that amount. Thanks!

[KJohnson]

For what it is worth, I think the proposed regs will be out this year (at least that is what the IRS said at a recent conference) and your client might want to wait until they are to do anything. You might want to give one of the folks in D.C. in my prior post a call.

Here is a link to a fairly heated debate between an attorney who works with these plans and other members of the benefits lilnk community. It also contains some information on the neonatology case which may be what mb is referring to.

http://benefitslink.com/boards/index.php?showtopic=6211

[Kirk Maldonado]

A number of years ago, I was retained by a client to set up one of these arrangements. After spending a lot of time, and racking up a significant legal bill, I concluded that you couldn't make one legitimately work, which was not what my client wanted to hear.

I have reviewed a number of these products, and I've never seen one that I thought made sense.

[KJohnson]

I've tracked through the regs and the arguments several times. On the prior post that I submitted you can find references to some cases where the IRS was unsuccessful in its attack on a 419A arrangement.

However the fact that the IRS won't issue PLRs combined with their past litigation practices gives you a good idea what they think about these arrangements.

As with most things, if it seems to good to be true, it probably doesn't work (or if it does, it won't work for long.)

[mbozek]

You should review IRS notice 95-34 for the various ways in which contributions to a 419A(f)(6) trust can be disallowed as a deduction under IRC 162.

[KJohnson]

Christie--In case you did not see them the 419A did come out on July 11th. You can find them here:

http://www.benefitslink.com/taxregs/419Af6...-prop-2002.html