Internal Revenue Bulletin: 2007-45 |
November 5, 2007 |
Notice
2007-83
1. Promoted Arrangements
Trust arrangements utilizing cash value
life insurance policies and purporting to provide welfare benefits to active
employees are being promoted to small businesses and other closely held
businesses as a way to provide cash and other property to the owners of the
business on a tax-favored basis. The arrangements are sometimes referred to by
persons advocating their use as “single employer plans” and sometimes as
“419(e) plans.” Those advocates claim that the employers’ contributions to the
trust are deductible under §§ 419 and 419A as qualified cost, but that
there is not a corresponding inclusion in the owner’s income.
A promoted trust arrangement may be
structured either as a taxable trust or a tax-exempt trust, i.e., a
voluntary employees’ beneficiary association (VEBA) that has received a determination
letter from the IRS that it is described in § 501(c)(9). The plan and the
trust documents indicate that the plan provides benefits such as current death
benefit protection, self-insured disability benefits, and/or self-insured
severance benefits to covered employees (including those employees who are also
owners of the business), and that the benefits are payable while the employee
is actively employed by the employer. The employer’s contributions are often
based on premiums charged for cash value life insurance policies. For example,
contributions may be based on premiums that would be charged for whole life
policies. As a result, the arrangements often require large employer
contributions relative to the actual cost of the benefits currently provided
under the plan.
Under these arrangements, the trustee uses
the employer’s contributions to the trust to purchase life insurance policies.
The trustee typically purchases cash value life insurance policies on the lives
of the employees who are owners of the business (and sometimes other key
employees), while purchasing term life insurance policies on the lives of the
other employees covered under the plan.
It is anticipated that after a number of
years the plan will be terminated and the cash value life insurance policies,
cash, or other property held by the trust will be distributed to the employees
who are plan participants at the time of the termination. While a small amount
may be distributed to employees who are not owners of the business, the timing
of the plan termination and the methods used to allocate the remaining assets
are structured so that the business owners and other key employees will
receive, directly or indirectly, all or a substantial portion of the assets
held by the trust.
Those advocating the use of these plans
often claim that the employer is allowed a deduction under § 419(c)(3) for
its contributions when the trustee uses those contributions to pay premiums on
the cash value life insurance policies, while at the same time claiming that
nothing is includible in the owner’s gross income as a result of the
contributions (or, if amounts are includible, they are significantly less than
the premiums paid on the cash value life insurance policies). They may also
claim that nothing is includible in the income of the business owner or other
key employee as a result of the transfer of a cash value life insurance policy
from the trust to the employee, asserting that the employee has purchased the
policy when, in fact, any amounts the owner or other key employee paid for the
policy may be significantly less than the fair market value of the policy. Some
of the plans are structured so that the owner or other key employee is the
named owner of the life insurance policy from the plan’s inception, with the
employee assigning all or a portion of the death proceeds to the trust.
Advocates of these arrangements may claim that no income inclusion is required
because there is no transfer of the policy itself from the trust to the
employees.
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Excerpts have been taken from this book about:
Senior abuses
The following example is unfortunately not an isolated incident of an abusive sales practice. If accountants were consulted more often by their clients, maybe the following would never happen.
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The following year, multiple insurers paid him commissions totaling $720,000 as his business with retirees soared.
But many of those sales came from steering older Americans into unw