1 person welfare plan

[Gary]

Say a one person/owner has a company. Actually it is a one member LLC.

He wants to contribute qualfied direct costs and annual additions to the plan.

The post retirement medical benefit is an account value of 100k at retirement to be used for medical expenses.

My thought is that as long as the contributions are within the 419 limits they are deductible.

And any investment income in the fund is taxable.

Are my above comments correect?

Thanks.

[vebaguru]

A one-member LLC is a pass-through entity. No medical deductions are allowed to the LLC including qualified direct costs and qualified additions to a qualified asset account. Those amounts are passed through to the member's personal return and may be deductible on the personal return within the application limitations.

The answer is different if the LLC has elected to be taxed as a "C" corporation under the check the box regulations. The contributions would then be tax deductible and excluded from the individual owner's income.

[Gary]

Thanks Vebaguru,

Say the LLC has one employee, the spouse, then would the portion attributable to the employee be deducted by the LLC?

Now if there are no employees can the amounts up to 419 limits be deducted by the individual on page 1 form 1040? Or does the entire contribution need to be tested on the Schedule A itmeized deductions schedule? Or perhaps the annual additions are fully deductible and the qualified direct costs need to go through the Schedule A itemized deduction test?

[vebaguru]

Is the spouse a common-law employee or an owner by attribution? Certainly for nondiscrimination testing purposes, the spouse is an owner. And in a community property state the argument could be made that unless the ownership can be made to be separate property, there is no way to avoid owner treatment rather than employee for the spouse.

However, I don't believe that IRS considers this to be a community property question and permits spouses to be employees. For nondiscrimination testing purposes they are considered owners, but not for pass-through treatment.

I wouldn't want to recommend this strategy to a client (tax advice under Circular 230), since this is not a black and white issue and abuses are likely to be met with IRS deduction disallowances.