419 Insurance Welfare Benefit Plans Continue to Get Accountants Into Trouble - Article by expert witness Lance Wallach. Material Advisors getting hit with large IRS 6707A
penalties. Find out if you are at risk, avoid the 419 plan penalty.
419 Insurance Welfare Benefit Plans Continue To Get Accountants Into
Trouble 419 insurance welfare benefit plans, 419 plan help, material advisors, Notice 2007-83, Notice 2007-84, Revenue Ruling 2007-65, Section 419, Ridge
Plan, SADI Trust, Grist Mill Trust, Beta Plan, Beta 419, Millennium Plan, Niche 419, Niche, Sterling Benefit
By Lance Wallach
Popular so-called “419 Insurance Welfare Benefit Plans”, sold by most insurance professionals, are
getting accountants and their clients into more and more trouble. A CPA who is approached by a client
about one of the abusive arrangements and/or situations to be described and discussed in this article
must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good
as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign
returns that fail to properly disclose listed transactions, including those discussed herein.
On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65.
Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as
listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set
forth in IRC Section 419A(f)(5),there must be cash value life insurance within the plan and excessive
tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must
have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of
benefits to owners and/or key and highly compensated employees. The notice identified numerous
specific concerns, among them:
1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-retirement, as
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-
characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section
404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant
to Section 4976. Taxpayers participating in these listed transactions should have, in most cases,
already disclosed such participation to the Service. Those who have not should do so at the earliest
possible moment. Failure to disclose can result in severe penalties – up to $100,000 for individuals
and $200,000 for corporations.
Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on
owner employees and other key employees, while only term insurance is offered to the rank and file.
These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax
deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in
fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the
Service declared, interposition of a trust does not change the nature of the transaction.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA
faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate
planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He
speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in
the press and has been featured on television and radio financial talk shows including NBC, National
Public Radio’s All Things Considered, and others. Lance has written numerous books including
Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk
Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA
best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at
516.938.5007, email@example.com, or visit www.taxadvisorexperts.org or
The information provided herein is not intended as legal, accounting, financial or any other type of
advice for any specific individual or other entity. You should contact an appropriate professional
for any such advice.