Advisors Debate Whether 419 Plans Are Worth The Risk
While recent tax court cases have allowed the continued use of Section 419 plans, some practitioners feel that the risk of an unfavorable court ruling far outweighs the rewards the plans offer. Others continue to endorse 419 plans.
In its most basic form, a 419 plan allows an employer to provide selected employees a current benefit on a tax-deductible basis. The employer makes contributions to a multiple employer trust, which funds these benefits with permanent life insurance policies.
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“419s are not against the law,” said Lawrence Bell, senior counsel, advanced markets for BISYS-Potomac, in a debate on 419 plans at the LIMRA Advanced Sales conference here. “You can do them if you dot your is and cross your ts.”
Bell said the problem people run into with these plans is that if there is an expectation of distribution, the IRS will treat it like a deferred compensation plan.
“If someones going into a 419 plan for a retirement benefit, then its not a good investment,” said Bell.
Under current practice, 419 plans are predominantly being marketed as death benefit only plans. Some experts feel that these plans also carry a cash reward for executives, and are more appropriately considered to be deferred compensation plans.
“419 says you can get a contribution deduction for providing a current benefit,” explained Bell.
“A life insurance policy is a current benefit,” he continued. “The amount of the deduction is the cost of the current death benefit.
“A cash value life insurance policy over the working life of an employee is a more cost-effective way to provide a benefit at the employer level than a term policy over that same working life,” said Bell.
Some experts, however, feel that the 419-plan approach is a little too aggressive, and promoters are reading much more into the law than was intended.
“There are a number of reasons for not doing 419 plans,” said Timothy Wuestenhagen, senior policyholder tax counsel, Securian Advisor Services/Worthmark Financial Services, LLP, a division of Minnesota Life.
“The first one is IRS challenges,” he said.
“Were aware that the IRS is aware of these 419 plans and I think you can bet that as 419 plans evolve and promoters get more ingenious with these plans, the IRS is going to continue to challenge them,” said Wuestenhagen.
“So anybody whos out there promoting these can probably expect continued challenges from the IRS,” he warned.