419 Welfare Benefit Plans just won’t die.
I was just forwarded a brand new promotional piece by an insurance marketing organization pitching 419 plans with life insurance. It’s just amazing, because you should stay away from these plans.
What is a 419 plan?
It’s an “employee benefit plan” that was designed to allow business owners to tax deduct the purchase of cash value life insurance where in retirement the plan would be terminated and the policies would revert to the owners (at which time they would take tax-free loans from the policy).
The IRS killed 419 plans
These plans were abused so much over time that the IRS has acted several times to try to kill them. Their attempts were not really successful until Notices 2007-65, 2007-83, and 2007-84 were passed.
What the notices essentially say is that, if an employer funded a 419 or VEBA plan with life insurance, the payment is NOT deductible. Not only that, but any plans that use cash value life insurance were put on the listed tax-transaction list. So, it’s truly amazing that at least one marketing organization is trying to bring back these plans.
The new plan I’ve seen pitched is using these plans to fund in a tax-favorable manner for post-retirement medical expenses. With the advent of 401(h) plans, there is no need to use 419 plans for post-retirement medical benefits.
If a client wants to build wealth with a tax-favorable structure with multiple benefits, I recommend looking at a Captive Insurance Company.
The bottom line with 419/VEBA plans: DO NOT USE THEM.
Frequently Asked Questions
If you don’t want to read the IRS notices (or try to interpret them), you can read the two pages of FAQs I created to explain their ramifications.
Roccy DeFrancesco, JD, is author of The Doctor's Wealth Preservation Guide, and founder of The Wealth Preservation Institute. The DWPG has recently been approved for up to 21 AMA PRA Category 1 CME Credits™ in a self-study format. If you would like to purchase the book at a 33% discount as benefit for being a reader of Physician’s Money Digest so you can earn CME credits in the comfort of your home, or if you have any questions about this article, email firstname.lastname@example.org.