IRS Put 419 Plans and VEBA Plans on Top of its Hit List

There are some administrators still promoting 419 plans. It defies logic to me that sales people will sell something they know or should know will not hold up under IRS scrutiny just so they can sell cash value life insurance. Most of the rest of the 419 sales people are now selling captive insurance and section 79 scams that the IRS is just starting to audit. But badk to the 419 plan.Back in the day (1996–2000), 419 welfare benefit plans used to be all the rage as a way for profitable business owners to reduce their taxes and build a tax-favorable nest egg under the cover of an “employee benefit plan.”

With an ambiguous tax code and some favorable tax court rulings, promoters of WPBs became emboldened and far too high profile in the late 1990s. This was amplified by the life insurance industry's internal marketing of WBPs because they were funded mainly with cash value life insurance.

Without fully explaining how these plans worked, I will simply state that an employer could try to take deductions of $25,000–$300,000+ where all of the money would go into a WBP and into a CVL insurance policy where it could grow tax free for years.

Depending on how aggressive the third-party administrator of these plans were, clients were told the money would either come out and be taxable when in retirement while some administrators even touted that business owners could get the money out tax free (which in my opinion was total nonsense, but that’s how they were sold).

The IRS steps in

Because of the aggressive marketing of these plans, the IRS put it on the top of its hit list. 419A(f)5 and A(f)6 plans, 419(e)3 plans as well as VEBA plans (which are also WPBs) all got hammered by the IRS in 2007 when it issued three revenue rulings. WBPs were also put on the tax transaction list.

U.S. Attorney goes after 419 plan promoter

One 419 plan promoter who has been around since the 1990s just had a complaint filed against him, his spouse and several related companies. It’s a 43-page complaint with request for a permanent injunction barring him and several companies from dealing with these plans. To read the complaint, click on the following link:

Be careful if it seems to good to be true. Be careful if an insurance agent, or worse, your accountant is pushing a captive insurance of section 79 scam. Many people that used to push 419 plans are now pushing new scams. Not all 419 plans were bad. Not all captives are bad. I have not seen a good section 79 plan.