Big Problems For Co's With 419 Welfare Benefit Plans Funded By Life Insurance
UPDATED: August 5, 2019
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What is a 419 welfare benefit plan?
A welfare benefit plan is effectively a corporate-sponsored insurance plan, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He explained, A corporation sets up a trust to provide insurance benefits for its employees. Thats the basic concept behind it. The corporation's contributions into the trust are tax-deductible and many of these plans allow you to pick and choose which employees you want involved in the plan.
Abuses with plans funded with life insurance
Burgess says that while not all of these plans bad, the ones that are bad are very abusive and those generally happen with plans that are funded with life insurance and that are commission-driven. He told us:
Basically what happens is that an insurance agent comes to a business owner and says, 'Hey, I can put this plan in place for you. You can make contributions to it. Ill set it up so that your money goes into this nice life insurance policy and it will all be tax-deductible to you. Then at some point in the future, you can borrow the money back and not pay any taxes on it.'
What people don't realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that theyre not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they're not going to allow it and that they're going to have to restate the income and pay taxes on it.
Two big issues surrounding 419 schemes
There are two big issues surrounding 419 schemes, according to Burgess paying taxes on the plan and finding out that individuals and companies no longer have any rights in the policy. He explained each issue:
- Paying taxes. Although somebody has spent a great deal of money to set this thing up, the IRS tells them, 'No, this doesnt work.' They now have to report the money they put into the policy as income and they owe the taxes on it. However, the policys got a big surrender charge on it and you cant just take the money out of the policy to pay the taxes because theres not enough available to you. That's a very big issue.
- No rights. The other issue is that once people get into these plans, they find out that the trust that was set up actually owns the policy, not the individual and not the corporation, and they no longer have any rights in that policy. So, they have to wait years and years and years to get anything back out.
If you've been the victim of a fraudulent or abusive tax shelter scheme, contact an experienced pensions fraud attorney to discuss your situation and evaluate what remedies may be available to you.