A Whole New Meaning

Of course, while this plan has benefits, it also has the drawback of the owners not having access to the policys cash values while they are within the plan. Typically, buy-sell owners do not look to cash values as a ready source of funds. If the policies values are depleted, making them vulnerable to being lapsed, this would defeat the purpose of a properly designed agreement.

It is also impermissible to structure the buy-sell as a stock redemption and still enjoy the benefits of the plan. Note the confidentiality and privacy of the companys buy-sell terms are not lost by participating within this plan since its provisions are not embodied within the plan nor need be provided to the plan trustee or plan sponsor.

The recent publication in July 2003 of final regulations regarding these plans helps to ensure that they are properly administered as multiple employer welfare arrangements (MEWA), thereby assuring that the benefits discussed here are obtainable.

A MEWA refers to a plan whereby 10 or more employers join a trust to provide employee welfare benefits. Section 419A(f)(6) plans provide for an exception to the deduction limits that apply to other welfare benefit plans. Employer participants collectively, not individually, share both the risk and return. All of the contributed funds are commingled, with no single employer contributing greater than 10% of the aggregate of contributions. 419A(f)(6) plans may not use experience rating of any one employer to determine either the contribution or benefit amounts nor may it be a deferred compensation plan.

Congress believed no restrictive limitations were necessary on the deductible contributions to 419A(f)(6) plans since no single employer could properly influence the trust either by making excessive contributions or through experience rating. The deduction still must satisfy the “ordinary and necessary business expense” standard of Section 162.

Some plan sponsors have sought to stretch the meaning of Section 419 with single employer 419(e) Plans. These plan sponsors have contended that since single employer plans are not subject to the final regulations governing multiple employer plans, the employer would have more access to the policies and cash values. Moreover, some plan sponsors have suggested contribution formulas resulting in a sizeable income tax deduction for premiums, however, the Internal Revenue Service is free and likely to question the math of computing the deduction.

In fact, IRS scrutiny is more likely than not on single employer plans taking deductions greater than the “qualified direct cost” of the benefits each year. The qualified direct cost is defined by the IRS as the difference between the premium paid and the surrender value of the policy, and is prorated based upon how many months of the year the coverage has been in force. An amount less than the premium is deductible, and in many instances, once the policy interest credited exceeds the mortality charges, the qualified direct cost is zero.

Put simply, if an employer could have all the benefits of almost unlimited tax deductible contributions, experience rating and access to cash values under single employer 419(e) plans, then all the sharing of risk and restrictions mandated by the final regulations governing 419A(f)(6) plans would be rendered meaningless.

Section 419A(f)(6) plans managed in a conservative fashion which have been tested under audit with respected fiduciaries and support entities provide ample reason to explore taking advantage of using the company checkbook for business owners personal life insurance in a BSA.

, JD, CLU, ChFC, FLMI, is president of Friend Financial Group, PLLC. He can be reached at [email protected].

Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.