Economic Benefit and 1099R Reporting for Self Employed

16 hours ago, ErnieG said:

One argument I've heard is a sole proprietor, or an owner of a pass-through entity, is not entitled to a deduction for that portion of the premium representing the economic benefit under IRC Section 404.

That's what I understand, so no 1099-R is required.

So, and I may be oversimplifying but it's Friday afternoon and a cold one is calling my name, the sole prop contributes $50,000 for example and say $1000 is attributable to the life insurance benefit, (s)he can only deduct $49,000 so there is no reporting of the $1000 PS58? Cool, I learned something today! Now about that cold one ... hope everyone has (or had if you're reading Monday) a great weekend.

Correct and thank you.  I'll buy the next round!!!

For anyone wondering what is the source of the rule that "a sole proprietor, or an owner of a pass-through entity, is not entitled to a deduction for that portion of the premium representing the economic benefit under IRC Section 404," it's in 1.404(e)-1A(b)(1) (last sentence) and (g).

ErnieG, this makes sense to me. Certainly if both the deduction were disallowed and the amount had to be reported on a 1099-R, the self-employed person would be double-taxed on the amount of the premium allocable to current life insurance protection, but how do you explain the last sentence of 1.72-16(b)(4), denying basis? Is it really referring to the rule denying deductibility, not the rule of 1.72-16(b)(2) that has the same result? I'll buy that it is, just wondering.

Meaning the sole proprietor cannot deduct the premium anyway, as 404(e) explains - is that right? So there is no need to issue them a taxable PS58 cost.

Luke:  My thought is relying on 1.72-16(b)(4) denying basis relates to the non deductibility of insurance premiums under 404(e) for owner-employees.  An employer is allowed a deduction under 404(e) and 1.72.16(b)(2) for premiums paid which participants pay the economic cost.  Therefore the economic cost creates the basis.  However, for an owner-employee the deduction for such cost is not allowed, therefore no tax, but pays on an after-tax basis.  The the lack of employer deduction and tax reporting does not cause the after-tax payment to create a basis.  

Following this one more step, 1016(a)(1)(B) does allow for the creation of basis for life insurance but that basis follows the owner of the policy.  In this situation, the owner-employee is not the owner but the plan trust is.  Considering no deduction it would be reasonable to assume no basis despite the after tax cost.

8 hours ago, ErnieG said:

Luke:  My thought is relying on 1.72-16(b)(4) denying basis relates to the non deductibility of insurance premiums under 404(e) for owner-employees. 

ErnieG and John Feldt, I agree with you both. I just think that in the last sentence of 1.72-16(b)(4) the regs should refer to amounts not deductible under 404(e) and 1.404(e)-1A(b)(1) (last sentence) and (g), not to amounts required to be included in income under 1.72-16(b)(2), as they seem to do. You get to the same result.

Agreed, thank you all for your insight and this disucssion.

Thank you, ErnieG. Like CuseFan, I learned another little detail of this that I was not previously plugged into.

Great forum for this type of dialogue.  Thank you.

Agreed - cheers!