419 Welfare Benefit Plans

The pitch

Contribute to a trust providing welfare benefits to the employees of ten or more employers, deduct the contribution in full under the Sec. 419A(f)(6) exemption, and fund it with life insurance.

Where it breaks

These trusts claim the Sec. 419A(f)(6) ten-or-more-employer exemption while maintaining SEPARATE ACCOUNTING PER EMPLOYER, which defeats the exemption.

What it costs you if it is wrong

Red flags specific to this structure

• Your contributions are held in a separate account
• The benefit being funded is life insurance on the owner
• The deduction is the reason the plan was presented to you
• You are told the arrangement is no longer reportable

Questions to ask the person selling this

Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.

1. 1Is my contribution tracked in an account separate from the other employers?
2. 2Who are the other participating employers?
3. 3What benefit is actually being funded, and for whom?
4. 4Is this a listed transaction, and does Notice 95-34 reach it?
5. 5Has any advisor been penalized for selling this arrangement?

Which of the Seven Markers this trips

• The economics do not work without the tax benefit

Score your own situation against all seven

The legitimate version

There is no legitimate version of this structure as it is marketed. As marketed, no. A genuine multiemployer welfare benefit fund without per-employer accounting is a different animal and is not what promoters sell.