Why has benefits community taken adverse view of conservatively-drafte
Started by John Koresko , Oct 16 1999 11:54 AM
46 replies to this topic
#1 
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as an expert witness lance wallach has never lost a 419 case 
IRS Attacks Business Owners in 419, 412, Sec 79 & Captive Insurance
Plans
Premise
Taxpayers who previously adopted 419, 412i, captiveinsurance or Section 79
plans are in big trouble.In general, taxpayers who engage in a “listed
transaction” must report such transaction to the IRS on Form 8886 every year
that they “participate” in the transaction, and you do not necessarily have to
make a contribution or claim a tax deduction to participate. Section 6707A of
the Code imposes severe penalties for failure to file Form 8886 with respect to
a listed transaction.
Taxpayers who previously adopted 419, 412i, captiveinsurance or Section 79
plans are in big trouble.In general, taxpayers who engage in a “listed
transaction” must report such transaction to the IRS on Form 8886 every year
that they “participate” in the transaction, and you do not necessarily have to
make a contribution or claim a tax deduction to participate. Section 6707A of
the Code imposes severe penalties for failure to file Form 8886 with respect to
a listed transaction.
Discussion
Massachusetts Society of Certified Public
Accountants, Inc.
Accountants, Inc.
Winter 2010
By Lance Wallach
Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.
In recent years, the IRS has identified many of these
arrangements as abusive devices to funnel tax deductible dollars to
shareholders and classified these arrangements as listed transactions."
These plans were sold by insurance agents, financial planners, accountants and
attorneys seeking large life insurance commissions. In general, taxpayers who
engage in a “listed transaction” must report such transaction to the IRS on
Form 8886 every year that they “participate” in the transaction, and you do not
necessarily have to make a contribution or claim a tax deduction to
participate. Section 6707A of the Code imposes severe penalties for failure to
file Form 8886 with respect to a listed transaction. But you are also in
trouble if you file incorrectly. I have received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file
Form 8886, but it also has to be prepared correctly. I only know of two people
in the U.S. who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over 50 phones calls to various IRS
personnel. The filing instructions for Form 8886 presume a timely filling. Most
people file late and follow the directions for currently preparing the forms.
Then the IRS fines the business owner. The tax court does not have jurisdiction
to abate or lower such penalties imposed by the IRS.
arrangements as abusive devices to funnel tax deductible dollars to
shareholders and classified these arrangements as listed transactions."
These plans were sold by insurance agents, financial planners, accountants and
attorneys seeking large life insurance commissions. In general, taxpayers who
engage in a “listed transaction” must report such transaction to the IRS on
Form 8886 every year that they “participate” in the transaction, and you do not
necessarily have to make a contribution or claim a tax deduction to
participate. Section 6707A of the Code imposes severe penalties for failure to
file Form 8886 with respect to a listed transaction. But you are also in
trouble if you file incorrectly. I have received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file
Form 8886, but it also has to be prepared correctly. I only know of two people
in the U.S. who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over 50 phones calls to various IRS
personnel. The filing instructions for Form 8886 presume a timely filling. Most
people file late and follow the directions for currently preparing the forms.
Then the IRS fines the business owner. The tax court does not have jurisdiction
to abate or lower such penalties imposed by the IRS.
"Many taxpayers who are no longer taking current tax
deductions for these plans continue to enjoy the benefit of previous tax
deductions by continuing the deferral of income from contributions and
deductions taken in prior years."
deductions for these plans continue to enjoy the benefit of previous tax
deductions by continuing the deferral of income from contributions and
deductions taken in prior years."
Many business owners adopted 412i, 419, captive insurance
and Section 79 plans based upon representations provided by insurance
professionals that the plans were legitimate plans and were not informed that
they were engaging in a listed transaction. Upon audit, these taxpayers were shocked
when the IRS asserted penalties under Section 6707A of the Code in the hundreds
of thousands of dollars. Numerous complaints from these taxpayers caused
Congress to impose a moratorium on assessment of Section 6707A penalties.
and Section 79 plans based upon representations provided by insurance
professionals that the plans were legitimate plans and were not informed that
they were engaging in a listed transaction. Upon audit, these taxpayers were shocked
when the IRS asserted penalties under Section 6707A of the Code in the hundreds
of thousands of dollars. Numerous complaints from these taxpayers caused
Congress to impose a moratorium on assessment of Section 6707A penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS
immediately started sending out notices proposing the imposition of Section
6707A penalties along with requests for lengthy extensions of the Statute of
Limitations for the purpose of assessing tax. Many of these taxpayers stopped
taking deductions for contributions to these plans years ago, and are confused
and upset by the IRS’s inquiry, especially when the taxpayer had previously
reached a monetary settlement with the IRS regarding its deductions. Logic and
common sense dictate that a penalty should not apply if the taxpayer no longer
benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that
a taxpayer has participated in a listed transaction if the taxpayer’s tax
return reflects tax consequences or a tax strategy described in the published
guidance identifying the transaction as a listed transaction or a transaction
that is the same or substantially similar to a listed transaction.
immediately started sending out notices proposing the imposition of Section
6707A penalties along with requests for lengthy extensions of the Statute of
Limitations for the purpose of assessing tax. Many of these taxpayers stopped
taking deductions for contributions to these plans years ago, and are confused
and upset by the IRS’s inquiry, especially when the taxpayer had previously
reached a monetary settlement with the IRS regarding its deductions. Logic and
common sense dictate that a penalty should not apply if the taxpayer no longer
benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that
a taxpayer has participated in a listed transaction if the taxpayer’s tax
return reflects tax consequences or a tax strategy described in the published
guidance identifying the transaction as a listed transaction or a transaction
that is the same or substantially similar to a listed transaction.
Clearly, the primary benefit in the participation of these plans
is the large tax deduction generated by such participation. Many taxpayers who
are no longer taking current tax deductions for these plans continue to enjoy
the benefit of previous tax deductions by continuing the deferral of income
from contributions and deductions taken in prior years. While the regulations
do not expand on what constitutes “reflecting the tax consequences of the
strategy,” it could be argued that continued benefit from a tax deferral for a
previous tax deduction is within the contemplation of a “tax consequence” of
the plan strategy. Also, many taxpayers who no longer make contributions or
claim tax deductions continue to pay administrative fees. Sometimes, money is
taken from the plan to pay premiums to keep life insurance policies in force.
In these ways, it could be argued that these taxpayers are still
“contributing,” and thus still must file Form 8886.
is the large tax deduction generated by such participation. Many taxpayers who
are no longer taking current tax deductions for these plans continue to enjoy
the benefit of previous tax deductions by continuing the deferral of income
from contributions and deductions taken in prior years. While the regulations
do not expand on what constitutes “reflecting the tax consequences of the
strategy,” it could be argued that continued benefit from a tax deferral for a
previous tax deduction is within the contemplation of a “tax consequence” of
the plan strategy. Also, many taxpayers who no longer make contributions or
claim tax deductions continue to pay administrative fees. Sometimes, money is
taken from the plan to pay premiums to keep life insurance policies in force.
In these ways, it could be argued that these taxpayers are still
“contributing,” and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits
from the transaction depends on the purpose of a particular transaction as
described in the published guidance that caused such transaction to be a listed
transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions,
appears to be concerned with the employer’s contribution/deduction amount
rather than the continued deferral of the income in previous years. Another
important issue is that the IRS has called CPAs material advisors if they
signed tax returns containing the plan, and got paid a certain amount of money
for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if
the CPA is incorporated. To avoid the fine, the CPA has to properly file Form
8918.
from the transaction depends on the purpose of a particular transaction as
described in the published guidance that caused such transaction to be a listed
transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions,
appears to be concerned with the employer’s contribution/deduction amount
rather than the continued deferral of the income in previous years. Another
important issue is that the IRS has called CPAs material advisors if they
signed tax returns containing the plan, and got paid a certain amount of money
for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if
the CPA is incorporated. To avoid the fine, the CPA has to properly file Form
8918.
Lance Wallach, National Society of Accountants Speaker of
the Year and member of the AICPA faculty of teaching professionals, Wallach is
a frequent speaker on retirement plans, financial and estate planning, and
abusive tax shelters. He is also a featured writer and has been interviewed on
television and financial talk shows including NBC, National Pubic Radio’s All
Things Considered and others. Lance authored Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA
best-selling books including Avoiding Circular 230 Malpractice Traps and Common
Abusive Small Business Hot Spots.
the Year and member of the AICPA faculty of teaching professionals, Wallach is
a frequent speaker on retirement plans, financial and estate planning, and
abusive tax shelters. He is also a featured writer and has been interviewed on
television and financial talk shows including NBC, National Pubic Radio’s All
Things Considered and others. Lance authored Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA
best-selling books including Avoiding Circular 230 Malpractice Traps and Common
Abusive Small Business Hot Spots.
The information provided
herein is not intended as legal, accounting, financial or any type of advice
for any specific individual or other entity. You should contact an appropriate
professional for any such advice.
herein is not intended as legal, accounting, financial or any type of advice
for any specific individual or other entity. You should contact an appropriate
professional for any such advice.
Posted 16 October 1999 - 11:54 AM
Would anyone like to begin a discussion? I am quite disappointed that the "traditional" benefits community has generally taken a vehemently adverse view toward conservatively drafted death benefit VEBAs constructed under sec. 419A(f)(6). I have looked at the IRS Memorandum of Issues which was filed in Tax Court in Booth, 108 T.C. no. 25. On page 9, IRS counsel Anne Durning admitted that a fully-insured death benefit plan is not an experience rated arrangement.
In June, I met with Treasury officials in Washington who admitted that the "experience rating" requirement is a "failure" in their desire to prevent taxpayers from using sec. 419A(f)(6).
In Booth, Judge Laro remarked no less than 9 times that the plan in question there did not make all of its assets available for all claims, thus creating a common law test advocated by IRS at trial and in its Memorandum. Cf. Reg. sec. 1.414(l)-(1)(B)(1).
Booth created a roadmap, which affirmed theories previously espoused in several articles in Journal of Taxation of Employee Benefits and the Life Insurance Answer Book, Ch. 39 (Panel Publishers, 1998).
Did you know there is legislation pending, S.1451 the Employee Welfare Benefit Equity Act, which will codify conservative design and confirm the propriety of these plans?
Is the community's reaction the product of fear, unfamiliarity, or concern over certain comments by certain members of the Chief Actuary's office? Does anyone remember the small d.b. plan cases? I seem to recall that the same people at IRS were responsible for the unreasonable positions articulated against thousands of d.b. plans. See, e.g., Citrus Valley.
I would like to hear your views and share experiences.
In June, I met with Treasury officials in Washington who admitted that the "experience rating" requirement is a "failure" in their desire to prevent taxpayers from using sec. 419A(f)(6).
In Booth, Judge Laro remarked no less than 9 times that the plan in question there did not make all of its assets available for all claims, thus creating a common law test advocated by IRS at trial and in its Memorandum. Cf. Reg. sec. 1.414(l)-(1)(B)(1).
Booth created a roadmap, which affirmed theories previously espoused in several articles in Journal of Taxation of Employee Benefits and the Life Insurance Answer Book, Ch. 39 (Panel Publishers, 1998).
Did you know there is legislation pending, S.1451 the Employee Welfare Benefit Equity Act, which will codify conservative design and confirm the propriety of these plans?
Is the community's reaction the product of fear, unfamiliarity, or concern over certain comments by certain members of the Chief Actuary's office? Does anyone remember the small d.b. plan cases? I seem to recall that the same people at IRS were responsible for the unreasonable positions articulated against thousands of d.b. plans. See, e.g., Citrus Valley.
I would like to hear your views and share experiences.
#2
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Posted 16 October 1999 - 07:00 PM
I was retained by a client to set up one of those arrangements. After an immense amount of time and effort (and legal fees), I determined that you could not set one up that complies with all applicable laws, including state insurance laws. For example, the State Insurance Commissioner has issued an opinion that these arrangements (at least those that not funded exclusively through insurance contracts) constitute illegal insurance companies in California. I certainly could not give a favorable opinion on any of the arrangements that I have reviewed (which have been several). My view is that they are set up principally to generate insurance commissions.
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Posted 16 October 1999 - 10:06 PM
The plans are pre-empted from regulation (and being deemed insurance companies) in California and elsewhere by ERISA section 514 if they are fully insured. The only thing a state can do is inquire to confirm the underlying insurance contracts. This is consistent with actions of, for example, the Ins. Depts. of both PA and NJ. I saw a memorandum from the Cal. Ins. Department several years ago which required multiple employer plans which were not fully insured to "register" with the department. I think you might want to recheck.
#4
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Posted 18 October 1999 - 02:25 PM
I have had the opportunity to look at a number of these proposals for death benefit VEBA's. The proposals that I have reviewed seem to be vulnerable on two counts, technical compliance and economic viability.
IRC § 419A(f)(6) provides an exemption for a ten or more employer plan from the strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Proponents of these plans in the insurance industry have attempted to fashion programs to meet the technical requirements of the Code relative to these types of plans. The road map is provided by the Booth Case, 108 TC 524, Tax Court, June 1997. Prior to the Booth decision, the IRS issued Notice 95-34, warning that there are "significant tax problems that may be raised" by the purported multiple employer trust arrangements.
The primary advantage of these programs for the insurance industry is that the policies sold are whole life policies with higher profitability and greater commissions than group insurance. The enticement to the taxpayer is that the policy premiums are immediately deductible.
Most of the programs that I have seen provide the opportunity for all employees to participate due to concerns about whether non-discrimination rules apply. However, because the employee is required to pay annually the PS 58 costs on the value of the insurance coverage, most non-key employees do not participate. If non-key employees do participate, the trustee generally purchases a term policy to meet their insurance needs, whereas the insurance coverage for key employees is provided through whole life policies which are often variable life policies.
The two primary lines of attack of the IRS are that the plans are really deferred compensation plans in disguise and that the plans are really individual plans masquerading as a multiple employer plan. Most of the plan designs address the single employer/multiple employer issue by making certain that the technical requirements for a multiple employer plan (access to all funds to pay benefits for all participants) are met. However, the reality is that the possibility of the use of any employer's premium payments to fund the benefits for any employees other than its own is slim and none.
To the best of my knowledge, the larger issue of whether the IRS can attack the programs in aggregate as deferred compensation even if the technical multiple employer VEBA requirements are met has not be decided. Thus, this line of attack my yet prove fruitful to the IRS which clearly is not enamored of these programs.
Even if the program meets the technical requirements, the programs that I have seen do not seem to provide a clean method of getting the money back into the hands of the company or the individual. Plan proponents argue that because the underlying assets in the plans are life insurance policies, the death benefit should be excluded from income under IRC § 101(a). However, the Trustee is generally the owner and the beneficiary of the policies, and the death benefit is paid by the carrier indirectly at the direction of the trustee.Therefore, some question exists whether the distribution qualifies for the exclusion.
Distributions of accumulations attributable to the employer's contributions (premium payments) are generally made when the employer terminates participation in the multiple employer plan. I have seen various methods for making distributions such as selling the policies to the individual (sometimes at a cash surrender value that miraculously explodes within a short time after the purchase ("springing cash value"); allowing the employer or the participant to borrow out the cash value; and transferring the values to a traditional VEBA to provide health care or other permitted benefits. Generally, however, the intent is to get the policy (trust) values directly into the hands of the key employees. None of the methods that I have seen provide a clearly permissible path to accomplish this end. If anyone has other experiences with distribution methods, I would be interested in hearing about them.
Unless the individual has a discernible need for death benefit protection, the programs may not have much economic viability even considering the tax advantage. In several cases, the individual would have been further ahead to pay the taxes, and invest the remainder in good quality corporate or tax-exempt bonds. The net return after tax wwould have been greater than the net after tax value of the expected distribution from the trust.
Section 1503 of the Financial Freedom Act of 1999 (H.R. 2488) provided that any policy of insurance which provides a cash value will not be a permissible benefit under IRC § 419A(f)(6). While the legislation was vetoed, it does provide another note of caution when considering these types of programs. Any employer considering participation in any of these programs might consider getting a guarantee from both the agent and the carrier promoting the program that, if legislation is passed within "X" number of years that reduces or eliminates the tax advantages of the program, the employer is entitled to a return of premiums. I have heard of agents and promoters willing to give such guarantees, but I am not certain whether the agent would have the power to bind the carrier to such a commitment. If not, the financial viability of the agent might become of paramount importance.
The above is perhaps a long winded response to Mr. Koresko's question about why this member of the benefit community is very cautious with regard to these programs. I do remember the small DB plan cases, and the loosing position that the IRS took. However, I also remember the concept of charitable split dollar which many in the insurance industry were also touting as a tax planning device (IRS Notice 99-36). The Service does not always lose.
------------------
[This message has been edited by JD Colville (edited 10-18-1999).]
[This message has been edited by JD Colville (edited 10-18-1999).]
IRC § 419A(f)(6) provides an exemption for a ten or more employer plan from the strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Proponents of these plans in the insurance industry have attempted to fashion programs to meet the technical requirements of the Code relative to these types of plans. The road map is provided by the Booth Case, 108 TC 524, Tax Court, June 1997. Prior to the Booth decision, the IRS issued Notice 95-34, warning that there are "significant tax problems that may be raised" by the purported multiple employer trust arrangements.
The primary advantage of these programs for the insurance industry is that the policies sold are whole life policies with higher profitability and greater commissions than group insurance. The enticement to the taxpayer is that the policy premiums are immediately deductible.
Most of the programs that I have seen provide the opportunity for all employees to participate due to concerns about whether non-discrimination rules apply. However, because the employee is required to pay annually the PS 58 costs on the value of the insurance coverage, most non-key employees do not participate. If non-key employees do participate, the trustee generally purchases a term policy to meet their insurance needs, whereas the insurance coverage for key employees is provided through whole life policies which are often variable life policies.
The two primary lines of attack of the IRS are that the plans are really deferred compensation plans in disguise and that the plans are really individual plans masquerading as a multiple employer plan. Most of the plan designs address the single employer/multiple employer issue by making certain that the technical requirements for a multiple employer plan (access to all funds to pay benefits for all participants) are met. However, the reality is that the possibility of the use of any employer's premium payments to fund the benefits for any employees other than its own is slim and none.
To the best of my knowledge, the larger issue of whether the IRS can attack the programs in aggregate as deferred compensation even if the technical multiple employer VEBA requirements are met has not be decided. Thus, this line of attack my yet prove fruitful to the IRS which clearly is not enamored of these programs.
Even if the program meets the technical requirements, the programs that I have seen do not seem to provide a clean method of getting the money back into the hands of the company or the individual. Plan proponents argue that because the underlying assets in the plans are life insurance policies, the death benefit should be excluded from income under IRC § 101(a). However, the Trustee is generally the owner and the beneficiary of the policies, and the death benefit is paid by the carrier indirectly at the direction of the trustee.Therefore, some question exists whether the distribution qualifies for the exclusion.
Distributions of accumulations attributable to the employer's contributions (premium payments) are generally made when the employer terminates participation in the multiple employer plan. I have seen various methods for making distributions such as selling the policies to the individual (sometimes at a cash surrender value that miraculously explodes within a short time after the purchase ("springing cash value"); allowing the employer or the participant to borrow out the cash value; and transferring the values to a traditional VEBA to provide health care or other permitted benefits. Generally, however, the intent is to get the policy (trust) values directly into the hands of the key employees. None of the methods that I have seen provide a clearly permissible path to accomplish this end. If anyone has other experiences with distribution methods, I would be interested in hearing about them.
Unless the individual has a discernible need for death benefit protection, the programs may not have much economic viability even considering the tax advantage. In several cases, the individual would have been further ahead to pay the taxes, and invest the remainder in good quality corporate or tax-exempt bonds. The net return after tax wwould have been greater than the net after tax value of the expected distribution from the trust.
Section 1503 of the Financial Freedom Act of 1999 (H.R. 2488) provided that any policy of insurance which provides a cash value will not be a permissible benefit under IRC § 419A(f)(6). While the legislation was vetoed, it does provide another note of caution when considering these types of programs. Any employer considering participation in any of these programs might consider getting a guarantee from both the agent and the carrier promoting the program that, if legislation is passed within "X" number of years that reduces or eliminates the tax advantages of the program, the employer is entitled to a return of premiums. I have heard of agents and promoters willing to give such guarantees, but I am not certain whether the agent would have the power to bind the carrier to such a commitment. If not, the financial viability of the agent might become of paramount importance.
The above is perhaps a long winded response to Mr. Koresko's question about why this member of the benefit community is very cautious with regard to these programs. I do remember the small DB plan cases, and the loosing position that the IRS took. However, I also remember the concept of charitable split dollar which many in the insurance industry were also touting as a tax planning device (IRS Notice 99-36). The Service does not always lose.
------------------
[This message has been edited by JD Colville (edited 10-18-1999).]
[This message has been edited by JD Colville (edited 10-18-1999).]
#5
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Posted 18 October 1999 - 11:51 PM
I want to thank JD Colville for taking the time to provide such an in-depth explanation of the issues relating to this topic. Not surprisingly, I wholeheartedly concur in his opinions.
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Posted 24 October 1999 - 04:42 PM
I'd like to respond to Messrs. Colville and Maldonado.
Notice 95-34 was basically the IRS' pre-trial statement of their position in Booth. It was intentionally nebulous and did not tell anybody anything new. The fact that a negative position was espoused should surprise no one.
The deferred compensation argument has been discredited on numerous occasions. For example, Judge Laro about killed it in Booth. Moreover, the Federal Circuit in Greensboro Pathology previously rejected the deferred compensation position espoused by IRS. In the case of a VEBA, the IRS cannot issue a determination letter if the plan contains elements of pension, profit sharing, annuity, stock bonus or other forms of deferred comp. Reg. 1.501©(9)-3(e), (f). It seems clear that if a plan gets a determination letter and operates according to the documents, the deferred comp argument is moot. The foregoing applies to death benefit plans. It does not apply to severance pay plans which primarily benefit HCEs and do not exclude retirement from the definition of severance. See, Wellons v. Com'r (7th Cir. 1994); Lima Surgical Associates v. U.S. (Fed. Cir. 1988). It is important to make the distinction.
The notion that termination of a plan equals deferred compensation is inconsistent with Reg. 1.501©(9)-4(d). In addition, that notion was discredited in Schneider, Moser, and Greensboro Pathology, as well as Booth.
The VEBA death benefit is exempt from income taxation under sec. 101(a). Ross v. Odom (5th Cir.); GCM 36969; PLR 8402016. In fact, about 2 months ago, IRS issued another TAM affirming the income tax free nature of a VEBA death benefit and reaffirmed the holding of Ross v. Odom.
The trustee is free to fund a death benefit with whatever is prudent. The cost to the trustee of providing the benefit is irrelevant to the determination as to whether a plan is discriminatory. American Assoc. of Christian Schools v. U.S., (5th Cir. 1988).
I agree that the proponents of the "springing cash value" and the "continuous term" schemes are looking for trouble.
My sources tell me that the next round of legislation will not include the Treasury Position you have noted in the Financial Freedom Act. I would refer you to S. 1451, the Employee Welfare Benefit Equity Act (Cong. Reg. 7/30/99), which has obtained considerable favor. Keep your eyes peeled, boys. AALU and ACLI have now gotten into the fray.
A lot of people don't seem to realize that the multiple employer VEBA has been around for a long time. See GCM 39284. The 10 or more employer plan concept does not differ much from the classic union welfare plan.
On the issue of plan terminations, the method of asset distribution you describe was approved by the IRS in 5 trusts I sent to Baltimore which received 501©(9) determinations in March and July 1994. Since termination distributions are not benefits, but merely the consequence of cessation of benefits, it is not inconsistent with Booth or Reg. 1.414(l)-1(B)(1) for there to be an allocation of plan assets for distribution to employees of the discontinuing employer. This can be in the form of cash or policies, whatever the assets may be. The issue you raise regarding asset segregation is not inconsistent with the single plan concept, provided any allocation of policies does not impact the availability of plan benefits for participants.
Your point with respect to charitable split dollar is notable, but a bit unfair. VEBAs have been around since 1928. Multiple employer VEBAs have been around since before ERISA. Charitable split dollar was created for one principal purpose and is of recent vintage. By the way, there are no legislative proponents of anything less than abolition of CSD.
When I spoke to Treasury, the main theme was that a certain person in the Chief Actuary's office just does not like the concept. But the IRS objections ring hollow. They just simply did not anticipate that employers would join together and place their assets at risk in a fully insured death benefit arrangement. IRS knows it cannot beat the DBO arrangement in court, especially after the admission in the Booth Memorandum of Issues that a fully-insured plan cannot be deemed experience rated.
There would have been no need for a legislative initiative this year if, in fact, IRS was correct in its position. You have to ask yourself why, in 15 years since 419A(f)(6) came into the law, the IRS refused to issue regs, revenue rulings, or PLRs with respect to the issue. It seems to me that by keeping many practitioners in a state of uneasiness, through innuendo and threat (like Notice 95-34), the Service did a much better job of preventing taxpayers from asserting their rights to tax reduction and cheaper estate planning protection. The responses to this topic in this message board amply support that analysis.
Notice 95-34 was basically the IRS' pre-trial statement of their position in Booth. It was intentionally nebulous and did not tell anybody anything new. The fact that a negative position was espoused should surprise no one.
The deferred compensation argument has been discredited on numerous occasions. For example, Judge Laro about killed it in Booth. Moreover, the Federal Circuit in Greensboro Pathology previously rejected the deferred compensation position espoused by IRS. In the case of a VEBA, the IRS cannot issue a determination letter if the plan contains elements of pension, profit sharing, annuity, stock bonus or other forms of deferred comp. Reg. 1.501©(9)-3(e), (f). It seems clear that if a plan gets a determination letter and operates according to the documents, the deferred comp argument is moot. The foregoing applies to death benefit plans. It does not apply to severance pay plans which primarily benefit HCEs and do not exclude retirement from the definition of severance. See, Wellons v. Com'r (7th Cir. 1994); Lima Surgical Associates v. U.S. (Fed. Cir. 1988). It is important to make the distinction.
The notion that termination of a plan equals deferred compensation is inconsistent with Reg. 1.501©(9)-4(d). In addition, that notion was discredited in Schneider, Moser, and Greensboro Pathology, as well as Booth.
The VEBA death benefit is exempt from income taxation under sec. 101(a). Ross v. Odom (5th Cir.); GCM 36969; PLR 8402016. In fact, about 2 months ago, IRS issued another TAM affirming the income tax free nature of a VEBA death benefit and reaffirmed the holding of Ross v. Odom.
The trustee is free to fund a death benefit with whatever is prudent. The cost to the trustee of providing the benefit is irrelevant to the determination as to whether a plan is discriminatory. American Assoc. of Christian Schools v. U.S., (5th Cir. 1988).
I agree that the proponents of the "springing cash value" and the "continuous term" schemes are looking for trouble.
My sources tell me that the next round of legislation will not include the Treasury Position you have noted in the Financial Freedom Act. I would refer you to S. 1451, the Employee Welfare Benefit Equity Act (Cong. Reg. 7/30/99), which has obtained considerable favor. Keep your eyes peeled, boys. AALU and ACLI have now gotten into the fray.
A lot of people don't seem to realize that the multiple employer VEBA has been around for a long time. See GCM 39284. The 10 or more employer plan concept does not differ much from the classic union welfare plan.
On the issue of plan terminations, the method of asset distribution you describe was approved by the IRS in 5 trusts I sent to Baltimore which received 501©(9) determinations in March and July 1994. Since termination distributions are not benefits, but merely the consequence of cessation of benefits, it is not inconsistent with Booth or Reg. 1.414(l)-1(B)(1) for there to be an allocation of plan assets for distribution to employees of the discontinuing employer. This can be in the form of cash or policies, whatever the assets may be. The issue you raise regarding asset segregation is not inconsistent with the single plan concept, provided any allocation of policies does not impact the availability of plan benefits for participants.
Your point with respect to charitable split dollar is notable, but a bit unfair. VEBAs have been around since 1928. Multiple employer VEBAs have been around since before ERISA. Charitable split dollar was created for one principal purpose and is of recent vintage. By the way, there are no legislative proponents of anything less than abolition of CSD.
When I spoke to Treasury, the main theme was that a certain person in the Chief Actuary's office just does not like the concept. But the IRS objections ring hollow. They just simply did not anticipate that employers would join together and place their assets at risk in a fully insured death benefit arrangement. IRS knows it cannot beat the DBO arrangement in court, especially after the admission in the Booth Memorandum of Issues that a fully-insured plan cannot be deemed experience rated.
There would have been no need for a legislative initiative this year if, in fact, IRS was correct in its position. You have to ask yourself why, in 15 years since 419A(f)(6) came into the law, the IRS refused to issue regs, revenue rulings, or PLRs with respect to the issue. It seems to me that by keeping many practitioners in a state of uneasiness, through innuendo and threat (like Notice 95-34), the Service did a much better job of preventing taxpayers from asserting their rights to tax reduction and cheaper estate planning protection. The responses to this topic in this message board amply support that analysis.
#7
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Posted 05 November 1999 - 02:12 AM
I support the relative value of the argument based on the VEBA regulations--I worked with multiple employer VEBA's in the 1960,s and 70's. I also concur that insurance commissioners and state insurance law may have some bearing. The types of death benefit plans which I established in the 70's were in fact based on death benefits funded by experience rated contracts payable to the VEBA which in turn were use to pay premiums on terminally funded group term policies. I received a PLR and also blessing from the California Commissioner on each of the transactions. These cases did not involve large commission structures, and were in fact mostly fee for service.
There should be a way to intelligently provide these benefits without the usual "doom" scenario coming from the legal profession. Please gentlemen, apply for a PLR and local commission approval before commissions are paid, and I'll bet you can work this matter out.
There should be a way to intelligently provide these benefits without the usual "doom" scenario coming from the legal profession. Please gentlemen, apply for a PLR and local commission approval before commissions are paid, and I'll bet you can work this matter out.
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Posted 12 November 1999 - 03:57 PM
Under the California Insurance Code, this sort of VEBA would have to register as a MEWA in order to lawfully operate. Whether the arrangement would satisfy the requirements of the Insurance Code; who knows?
From a tax perspective, I would be wary because the arrangement is rather abusive and certainly not in keeping with the spirit of the law. Don't expect much sympathy from the court if you go to battle on this one.
From a tax perspective, I would be wary because the arrangement is rather abusive and certainly not in keeping with the spirit of the law. Don't expect much sympathy from the court if you go to battle on this one.
#9
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Posted 13 November 1999 - 12:43 AM
I contacted the California Department of Insurance on this point. They said that they consider these plans (I only inquired about self-funded plans) to be unlicensed insurance companies and will shut them down if they find them.
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Posted 13 November 1999 - 01:43 AM
Mr. Maldonado:
About 4 years ago, the Cal Ins Commission issued a memo about MEWAs. This was prompted by a fraud which occurred in Northern California.
ERISA sec. 514 allows self-funded MEWAs to be deemed insurance companies. Cal is within its discretion to require registration.
Fully-insured plans are not deemed insurance companies. Cal cannot regulate them, but may "inquire" to confirm that the benefits are fully insured.
We have already successfully rejected the New Jersey Insurance Commissioner in this regard, with respect to the Regional Employers Assurance Leagues VEBA trust, a fully insured arrangement.
About 4 years ago, the Cal Ins Commission issued a memo about MEWAs. This was prompted by a fraud which occurred in Northern California.
ERISA sec. 514 allows self-funded MEWAs to be deemed insurance companies. Cal is within its discretion to require registration.
Fully-insured plans are not deemed insurance companies. Cal cannot regulate them, but may "inquire" to confirm that the benefits are fully insured.
We have already successfully rejected the New Jersey Insurance Commissioner in this regard, with respect to the Regional Employers Assurance Leagues VEBA trust, a fully insured arrangement.
#11
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Posted 13 November 1999 - 02:00 AM
Mr. Ekarno:
What is the spirit of the law? What does "abusive" mean?
Such arguments are usually advanced by Treasury people who cannot articulate a credible reason for disagreement, especially when they have lost repeatedly in court, as in the welfare benefit area.
There is nobody on the present Treasury welfare plan task force who was a player in the 1984 amendments. The legislative history creates a broad exemption based on some basic principles. Why is it abusive to design something that fits exactly what Congress saw fit to exempt? That's like saying that cross-tested plans were abusive prior to issuance of the 401(a)(4) regulations.
Prior to the 1984 act, the IRS recognized the propriety of multiple employer welfare plans. See, GCM 39284 (multiple employer VEBAs should be guided by rules similar to those of pensions plans under sec. 413). The 419A(f)(6) exception was a political response to the existence of hundreds of multiple employer welfare plans sponsored by various organizations. See, American Assn. of Christian Schools v. U.S. (11th Cir. 1988).
Unions have had them for years, and deductions are not limited in the union context. See, sec. 419A(f)(5). Why does anyone presume that non-union employers should not be given the same benefits and opportunities, as have materialized under sec. 419A(f)(6).
As a matter of fact, if you look at the Treasury Proposal for 419A(f)(6), it doesn't even address the deductions [which many people say are so "abusive"]. It seeks only to eliminate the right to terminate a plan! Why are they pushing this? Because in 20 years, in 4 tries, they were unable to convince a court that terminations are tantamount to deferred compensation. Moreover, Treasury has repeatedly lost on issues of the reasonableness of a welfare plan deduction.
If the courts don't find it abusive, why do members of the professional community persist in perpetuating this inaccuracy?
Of course, there is a rampant disease among some professionals in this country: "If I didn't think of it, or I haven't heard about it, it ain't no good." It's a shame, but it exists.
What is the spirit of the law? What does "abusive" mean?
Such arguments are usually advanced by Treasury people who cannot articulate a credible reason for disagreement, especially when they have lost repeatedly in court, as in the welfare benefit area.
There is nobody on the present Treasury welfare plan task force who was a player in the 1984 amendments. The legislative history creates a broad exemption based on some basic principles. Why is it abusive to design something that fits exactly what Congress saw fit to exempt? That's like saying that cross-tested plans were abusive prior to issuance of the 401(a)(4) regulations.
Prior to the 1984 act, the IRS recognized the propriety of multiple employer welfare plans. See, GCM 39284 (multiple employer VEBAs should be guided by rules similar to those of pensions plans under sec. 413). The 419A(f)(6) exception was a political response to the existence of hundreds of multiple employer welfare plans sponsored by various organizations. See, American Assn. of Christian Schools v. U.S. (11th Cir. 1988).
Unions have had them for years, and deductions are not limited in the union context. See, sec. 419A(f)(5). Why does anyone presume that non-union employers should not be given the same benefits and opportunities, as have materialized under sec. 419A(f)(6).
As a matter of fact, if you look at the Treasury Proposal for 419A(f)(6), it doesn't even address the deductions [which many people say are so "abusive"]. It seeks only to eliminate the right to terminate a plan! Why are they pushing this? Because in 20 years, in 4 tries, they were unable to convince a court that terminations are tantamount to deferred compensation. Moreover, Treasury has repeatedly lost on issues of the reasonableness of a welfare plan deduction.
If the courts don't find it abusive, why do members of the professional community persist in perpetuating this inaccuracy?
Of course, there is a rampant disease among some professionals in this country: "If I didn't think of it, or I haven't heard about it, it ain't no good." It's a shame, but it exists.
#12
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Posted 14 November 1999 - 09:02 PM
For many years various promoters, including Prime, have tried to get me involved with VEBA's. I have styed away because I have yet to find a promoter who could clearly support his position. The only VEBA's that I have found acceptable are certain large VEBA's that provide Accident & Health benefits e.g JC Penney. All the ones that offer other than A&H have the same deficiency that killed Prime, they dont operate in a proper manner. The accounting, actuarial and administration fall short and put the plans out of compliance. Apart from the puzzling universal reluctance of the so called "professional" and "expert" community to accept anything they never heard of, the explanations of VEBA's is very weak. It took approx. 10 years for the first 401k and the first 125 Cafeteria plan to be accepted by these same people, what do you expect with a weak product explanation. You also keep referring to VEBA's as having been around for a long time, please support this. Are you talking about the term VEBA, or A&h VEBAs. DBO VEBAs, malpractice tail funding VEBAs, Severance pay VEBAs ???. To lump all the uses of VEBAs to support your claims makes your entire argument suspect.
#13
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Posted 15 November 1999 - 12:48 AM
In response to GBurns:
The VEBA first appeared in the Revenue Act of 1928. The legislative history recites that Congress wanted to encourage people to join together in an organization to provide benefits as an alternative to regular insurance operations. The legislation was not limited as to particular benefits, although it became clear that these plans were to provide "welfare benefits." It is impossible to pinpoint exactly the date certain types of benefits began popping up, although the case law and IRS pronouncements go back decades ago. [ As an aside to your comment about malpractice tail VEBAs, the case of Anesthesiology Associates declared that a VEBA could not provide malpractice insurance since such insurance protected the employer, not the employees.]
For a complete discussion of the flaws of the Prime plan, I would refer you to: "419 Welfare Benefit Plans Require Careful Drafting to Survive IRS Attack," 3 Jrnl Tax Emp Ben 147 (Nov/Dec 1995). In the 1999 supplement to the Life Insurance Answer Book, Ch. 39 (Panel), there is a complete update with reference to the particulars of the Booth decision which declared Prime flawed, consistent with the aforementioned article.
The principal reason Prime turned out to flawed was failure to adhere to a fundamental design requirement of multiple employer plans. All assets of the plan were not available for the payment of any claim. As Judge Laro said: "Each employee's claim could be funded only from the account of the employee's employer and the employee had no recourse to the extent of any shortfall." 108 T.C. 524. Thus, the severance benefit of that plan failed the experience rating test: "The Prime plan accomplished [experience rating] by adjusting employees' benefits to equal their employer's contributions." 108 T.C. at 575. The trustee had the unilateral right to reduce benefits. This was a no no. The judge went on: "The trust agreement limited an employee's right to benefits to the assets of his or her employee group . . . ." "A single pool was simply not desireable because participating employers did not want to accept the risk that their contributions wwould be used to pay the severance claims of other employers' employee[s] . . . ."
The Laro common law test of experience rating is now virtually identical to the former test of single plan, as first defined in Reg. 1.414(l)-1(B)(1). In fact, IRS argued for application of that regulation. The Judge did not cite to it, but his analysis was virtually identical to what the regulation would command. [Of historical note, IRS Chief Counsel advised over 15 years previously that this regulation would be consulted with respect to multiple employer VEBAs which provided medical benefits. GCM 39284.]
Please refer to the first message I left in this topic. The IRS position in the case as articulated in its pretrial Memorandum of Issues filed in Tax Court, and thus Judge Laro's opinion, focused on the SEVERANCE BENEFIT. You see, Prime could not sell people on the idea that other people's employees might have rights to everyone's contributions. Thus, they created this idea of the "separate vault" that no one else could invade. Everyone with a little insight to union and non-union multiple employer welfare plans saw the charade for what it was. Of course, Prime trumpeted its marketing din and shoveled a lot of B.S. and convinced a lot of people that the traditional definitions would not apply to 419A(f)(6). Those who bought that explanation were simply foolish and shooting craps.
What Prime and 99% of the 419A(f)(6) operators missed was a very simple but extraordinary notion. If you can fully insure your benefits, it doesn't matter that you put all assets available for all claims. You see, the risk is not only on the trust, but the predominant risk has shifted to the insurance carrier behind the benefit. You can't do this with a SEVERANCE BENEFIT, because there is no ready market of carriers offering SEVERANCE insurance. However, if you use a DEATH BENEFIT [or other insurable benefits, for that matter], you can put all assets at theoretical risk, but the primary risk will always be on the insurance company through whom the trust reinsures the death benefit risk.
*********************************************
The risk is the price of the deduction. The risk is real because of the possibility that the insurance coverage could be blown by human error or carrier insolvency. But once the plan gets big enough, it becomes irrelevant. For example, in a plan which is a client of mine, the cash values of policies exceed $50 million spread over 200+ employers. A $250,000 claim here and there would be immaterial, considering that more than $30 million in tax benefits have been derived by the employers. But the risk is small because of close monitoring and the pecuniary interest of insurance guys in writing the reinsurance coverage.
********************************************
This extraordinary notion, first appearing in that 1995 article, was accepted by IRS counsel in the Booth case. On page 9 of the Memorandum of Issues, Ms. Durning admits that while the severance benefit of Prime was experience rated, the death benefit was "a guaranteed cost contract" or "pure insurance" and was, therefore, not an experience rated arrangement.
Even this "abusive" plan, as people were so apt to describe Prime, was held to be a "reasonable construction of the statutory provisions" dealing with "a novel issue." Booth at 578. No penalties were assessed. In addition, IRS failed for the fourth time to get a welfare plan reclassified because of the right to terminate. The right to terminate does not create a deferred compensation plan. Booth, 108 TC at 564. Of course not. The VEBA regulations confirm this. Reg. 1.501©(9)-4(d).
Thousands of people have misconstrued Booth, principally because they failed to distinguish between the characteristics of the severance benefit and the death benefit. In addition, only a handful actually got the IRS and taxpayers' Memoranda from the Tax Court in order to reconcile the Laro opinion.
In their haste to label welfare benefit plan advocates as tax cheats, too many so-called experts have failed to discern the nuances of the Prime plan and the meaning of Booth. It was a lot easier to just say, "See, I told you so." In reality, though, Prime was easy to criticize because it was structurally unsound as a matter of historical precedent.
The death benefit, fully insured model, comports with the legislative history of 419A(f)(6). Congress said the plan has to look more like an insurance company than a "fund." All insurance companies reinsure their risks to some degree. The 419A(f)(6) VEBA reinsures all of its risks. You can't look any closer to an insurance company. Of course, a couple of states, like California, agree with that analysis.
The inability to overcome this plain fact has caused Treasury to petition Congress for a change. After all, if the plans were violating the law, there would be no need for new legislation. Treasury concedes that "experience rating" as a tool to regulate 419A(f)(6) is a failure, especially after the concession in the Booth papers. Surprising, Treasury is not seeking to curb 419A(f)(6) by attacking the deduction. It seeks to eliminate termination distributions and severance benefits. Treasury believes that people will stop using the plans if they can't get the money out through termination.
In reality, though, the attention given by Treasury confirms that permanent plans for estate planning purposes will be statutorily embedded as valid.
In conclusion, if a benefit can be insured, it will not be experience rated. If all of the trust assets are at least theoretically available for payment of any claim, it is a single plan. Thus, the fully-insured death benefit plan designed under the pseudo-insurance company paradigm is a much different animal than the Prime severance plan at issue in Booth.
The VEBA first appeared in the Revenue Act of 1928. The legislative history recites that Congress wanted to encourage people to join together in an organization to provide benefits as an alternative to regular insurance operations. The legislation was not limited as to particular benefits, although it became clear that these plans were to provide "welfare benefits." It is impossible to pinpoint exactly the date certain types of benefits began popping up, although the case law and IRS pronouncements go back decades ago. [ As an aside to your comment about malpractice tail VEBAs, the case of Anesthesiology Associates declared that a VEBA could not provide malpractice insurance since such insurance protected the employer, not the employees.]
For a complete discussion of the flaws of the Prime plan, I would refer you to: "419 Welfare Benefit Plans Require Careful Drafting to Survive IRS Attack," 3 Jrnl Tax Emp Ben 147 (Nov/Dec 1995). In the 1999 supplement to the Life Insurance Answer Book, Ch. 39 (Panel), there is a complete update with reference to the particulars of the Booth decision which declared Prime flawed, consistent with the aforementioned article.
The principal reason Prime turned out to flawed was failure to adhere to a fundamental design requirement of multiple employer plans. All assets of the plan were not available for the payment of any claim. As Judge Laro said: "Each employee's claim could be funded only from the account of the employee's employer and the employee had no recourse to the extent of any shortfall." 108 T.C. 524. Thus, the severance benefit of that plan failed the experience rating test: "The Prime plan accomplished [experience rating] by adjusting employees' benefits to equal their employer's contributions." 108 T.C. at 575. The trustee had the unilateral right to reduce benefits. This was a no no. The judge went on: "The trust agreement limited an employee's right to benefits to the assets of his or her employee group . . . ." "A single pool was simply not desireable because participating employers did not want to accept the risk that their contributions wwould be used to pay the severance claims of other employers' employee[s] . . . ."
The Laro common law test of experience rating is now virtually identical to the former test of single plan, as first defined in Reg. 1.414(l)-1(B)(1). In fact, IRS argued for application of that regulation. The Judge did not cite to it, but his analysis was virtually identical to what the regulation would command. [Of historical note, IRS Chief Counsel advised over 15 years previously that this regulation would be consulted with respect to multiple employer VEBAs which provided medical benefits. GCM 39284.]
Please refer to the first message I left in this topic. The IRS position in the case as articulated in its pretrial Memorandum of Issues filed in Tax Court, and thus Judge Laro's opinion, focused on the SEVERANCE BENEFIT. You see, Prime could not sell people on the idea that other people's employees might have rights to everyone's contributions. Thus, they created this idea of the "separate vault" that no one else could invade. Everyone with a little insight to union and non-union multiple employer welfare plans saw the charade for what it was. Of course, Prime trumpeted its marketing din and shoveled a lot of B.S. and convinced a lot of people that the traditional definitions would not apply to 419A(f)(6). Those who bought that explanation were simply foolish and shooting craps.
What Prime and 99% of the 419A(f)(6) operators missed was a very simple but extraordinary notion. If you can fully insure your benefits, it doesn't matter that you put all assets available for all claims. You see, the risk is not only on the trust, but the predominant risk has shifted to the insurance carrier behind the benefit. You can't do this with a SEVERANCE BENEFIT, because there is no ready market of carriers offering SEVERANCE insurance. However, if you use a DEATH BENEFIT [or other insurable benefits, for that matter], you can put all assets at theoretical risk, but the primary risk will always be on the insurance company through whom the trust reinsures the death benefit risk.
*********************************************
The risk is the price of the deduction. The risk is real because of the possibility that the insurance coverage could be blown by human error or carrier insolvency. But once the plan gets big enough, it becomes irrelevant. For example, in a plan which is a client of mine, the cash values of policies exceed $50 million spread over 200+ employers. A $250,000 claim here and there would be immaterial, considering that more than $30 million in tax benefits have been derived by the employers. But the risk is small because of close monitoring and the pecuniary interest of insurance guys in writing the reinsurance coverage.
********************************************
This extraordinary notion, first appearing in that 1995 article, was accepted by IRS counsel in the Booth case. On page 9 of the Memorandum of Issues, Ms. Durning admits that while the severance benefit of Prime was experience rated, the death benefit was "a guaranteed cost contract" or "pure insurance" and was, therefore, not an experience rated arrangement.
Even this "abusive" plan, as people were so apt to describe Prime, was held to be a "reasonable construction of the statutory provisions" dealing with "a novel issue." Booth at 578. No penalties were assessed. In addition, IRS failed for the fourth time to get a welfare plan reclassified because of the right to terminate. The right to terminate does not create a deferred compensation plan. Booth, 108 TC at 564. Of course not. The VEBA regulations confirm this. Reg. 1.501©(9)-4(d).
Thousands of people have misconstrued Booth, principally because they failed to distinguish between the characteristics of the severance benefit and the death benefit. In addition, only a handful actually got the IRS and taxpayers' Memoranda from the Tax Court in order to reconcile the Laro opinion.
In their haste to label welfare benefit plan advocates as tax cheats, too many so-called experts have failed to discern the nuances of the Prime plan and the meaning of Booth. It was a lot easier to just say, "See, I told you so." In reality, though, Prime was easy to criticize because it was structurally unsound as a matter of historical precedent.
The death benefit, fully insured model, comports with the legislative history of 419A(f)(6). Congress said the plan has to look more like an insurance company than a "fund." All insurance companies reinsure their risks to some degree. The 419A(f)(6) VEBA reinsures all of its risks. You can't look any closer to an insurance company. Of course, a couple of states, like California, agree with that analysis.
The inability to overcome this plain fact has caused Treasury to petition Congress for a change. After all, if the plans were violating the law, there would be no need for new legislation. Treasury concedes that "experience rating" as a tool to regulate 419A(f)(6) is a failure, especially after the concession in the Booth papers. Surprising, Treasury is not seeking to curb 419A(f)(6) by attacking the deduction. It seeks to eliminate termination distributions and severance benefits. Treasury believes that people will stop using the plans if they can't get the money out through termination.
In reality, though, the attention given by Treasury confirms that permanent plans for estate planning purposes will be statutorily embedded as valid.
In conclusion, if a benefit can be insured, it will not be experience rated. If all of the trust assets are at least theoretically available for payment of any claim, it is a single plan. Thus, the fully-insured death benefit plan designed under the pseudo-insurance company paradigm is a much different animal than the Prime severance plan at issue in Booth.
#14
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Posted 15 November 1999 - 11:09 AM
To GBurns, again:
Please describe which accounting, actuarial and administrative characteristics, in your mind, caused the plans to "fall short" and be "out of compliance."
There is no actuarial requirement for VEBAs under sec. 419A(f)(6), because sec. 419 does not apply. See, generally, Moser v. Com'r.
Separate accounting is permitted under Reg. sec. 1.414(l)-1(B)(1), so long as the method of accounting does not impair the availability of a benefit. See, e.g., Booth, where the method of accounting DID impair and potentially reduce the level of a benefit. The regulation even allows separately allocated insurance contracts, ala 412(i) defined benefit plans.
Administration would be no different than cafeteria plan or simple d.b. admin. 5500s are not even required if the plan has < 100 participants.
It's hard to say anything is out of "compliance" when the Service has failed to issue regulations, rulings, or procedures in the 15 years since 419A(f)(6) was enacted. But I would like to know what exactly it was that bothered you.
Please describe which accounting, actuarial and administrative characteristics, in your mind, caused the plans to "fall short" and be "out of compliance."
There is no actuarial requirement for VEBAs under sec. 419A(f)(6), because sec. 419 does not apply. See, generally, Moser v. Com'r.
Separate accounting is permitted under Reg. sec. 1.414(l)-1(B)(1), so long as the method of accounting does not impair the availability of a benefit. See, e.g., Booth, where the method of accounting DID impair and potentially reduce the level of a benefit. The regulation even allows separately allocated insurance contracts, ala 412(i) defined benefit plans.
Administration would be no different than cafeteria plan or simple d.b. admin. 5500s are not even required if the plan has < 100 participants.
It's hard to say anything is out of "compliance" when the Service has failed to issue regulations, rulings, or procedures in the 15 years since 419A(f)(6) was enacted. But I would like to know what exactly it was that bothered you.
#15
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Posted 18 November 1999 - 06:23 PM
I recommend an article in the May 1999 issue of Journal of Accountancy, entitled: Are VEBAs Worth Another Look.
#16
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Posted 18 November 1999 - 07:23 PM
The article Bob suggests is online, here: http://www.aicpa.org/pubs/jofa/may1999/ross.htm
#17
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Posted 19 November 1999 - 01:40 AM
The article Mr. Parks and Mr. Baker refer to was plagarized by the alleged writer in violation of Confidentiality Agreements executed by his company in 1995. For the original, see "VEBAs Can Reduce Taxes and Preserve Wealth, Taxation For Accountants, December 1996, p. 333. The AICPA was notified by my law firm about this sad fact.
The JoA article was partially inaccurate, though. Sole Proprietors cannot take the VEBA deduction if it is a death benefit plan. IRC sec. 264. The same applies to partners. Some people have alleged that 707© allows the partnership deduction under a theory of "guaranteed payment." However, the legislative history under 419 states that 264 trumps 419. If that is true, then 264 should trump 707©. The partners, who are the taxpayers, are direct or indirect beneficiaries of the death benefit, so 264 should apply. IRS has issued no guidance on this point, but the deduction cannot be presumed.
This is another instance where a marketer has found a way to get himself in print. JoA did not even inquire if the alleged author of the article was a CPA, attorney, or someone with credentials to express the opinions and conclusions of law. By the way, the guy used to be an economics professor who got into the life insurance business about 3 years ago.
The JoA article was partially inaccurate, though. Sole Proprietors cannot take the VEBA deduction if it is a death benefit plan. IRC sec. 264. The same applies to partners. Some people have alleged that 707© allows the partnership deduction under a theory of "guaranteed payment." However, the legislative history under 419 states that 264 trumps 419. If that is true, then 264 should trump 707©. The partners, who are the taxpayers, are direct or indirect beneficiaries of the death benefit, so 264 should apply. IRS has issued no guidance on this point, but the deduction cannot be presumed.
This is another instance where a marketer has found a way to get himself in print. JoA did not even inquire if the alleged author of the article was a CPA, attorney, or someone with credentials to express the opinions and conclusions of law. By the way, the guy used to be an economics professor who got into the life insurance business about 3 years ago.
#18
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Posted 20 November 1999 - 10:04 PM
While I do understand that the article was plagiarized and that like a large percentage of articles it had inaccuracies, what bothers me even more is your inference re his credentials. Are you saying that an economics professor could not have a Masters in Taxation, or in Accounting, or be a CHFc? Are you also stating that all CPAs and lawyers are tax competent or even trained in taxation ? Are you saying that the interpretation of the IRC is the practice of law?? I was taught that it was the substance not the form that was important. I let the merits of the message stand on its own, and I do have a strong objection to pompous people.
#19
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Posted 21 November 1999 - 09:20 PM
to GBurns:
Actually, I would respectfully suggest, having pursued a minor in economics myself, that the typical curriculum contains no required tax courses. Consequently, I would strongly argue, absent evidence to the contrary, that I could never get a court to accept an economics professor as an expert in taxation.
Moreover, the article you alluded to contains "opinions" relating to ERISA, debtor/creditor relations, structure of multiple employer plans, exempt organizations, interpretation of case law, and plain old tax. Therefore, I would again suggest that such a panoply of legal topics would be most credibly presented by one with training in the law.
I do not think it is pompous to suggest that a person should be competent to express an opinion before a major trade magazine decides to print a piece.
Further, having my own knowledge of this individual's credentials and experience, it is not pompous to state a fact.
I am a little surprised you would come to the defense of a plagiarist. This exhibition is one of the reasons for much of the polarization in the 419A(f)(6) area. Too many unqualified marketeers run around giving legal opinions, and too few people call them on the carpet and question their credentials.
Actually, I would respectfully suggest, having pursued a minor in economics myself, that the typical curriculum contains no required tax courses. Consequently, I would strongly argue, absent evidence to the contrary, that I could never get a court to accept an economics professor as an expert in taxation.
Moreover, the article you alluded to contains "opinions" relating to ERISA, debtor/creditor relations, structure of multiple employer plans, exempt organizations, interpretation of case law, and plain old tax. Therefore, I would again suggest that such a panoply of legal topics would be most credibly presented by one with training in the law.
I do not think it is pompous to suggest that a person should be competent to express an opinion before a major trade magazine decides to print a piece.
Further, having my own knowledge of this individual's credentials and experience, it is not pompous to state a fact.
I am a little surprised you would come to the defense of a plagiarist. This exhibition is one of the reasons for much of the polarization in the 419A(f)(6) area. Too many unqualified marketeers run around giving legal opinions, and too few people call them on the carpet and question their credentials.
#20
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Posted 22 November 1999 - 01:07 PM
This seems like a classic substance vs. form issue.
The problem with it as I see it is that that the substance of it - and the reason some promoters can sell it - is that it allows employers to provide deferred compensation (and deductions) that would not be allowed under the rules that apply to deferred compensation - and the way this occurs is to structure it in the otherwise economically unsound guise of a multiple employer death benefit VEBA. Give me a break - why would anyone buy insurance and put it into a multiple employer VEBA, and incur all of the costs of going through the VEBA, if all they were getting was a death benefit?
The problem with this for me and I suspect for the IRS is that it doesn't meet the Smell Test.
The problem with it as I see it is that that the substance of it - and the reason some promoters can sell it - is that it allows employers to provide deferred compensation (and deductions) that would not be allowed under the rules that apply to deferred compensation - and the way this occurs is to structure it in the otherwise economically unsound guise of a multiple employer death benefit VEBA. Give me a break - why would anyone buy insurance and put it into a multiple employer VEBA, and incur all of the costs of going through the VEBA, if all they were getting was a death benefit?
The problem with this for me and I suspect for the IRS is that it doesn't meet the Smell Test.
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