“Grist Mill Trust” “Penn Mont” “Real Veba” “United
Financial Group” “Kenny Hartstein” “Millennium Plan”
“Ridge Plan” “Professional benefits Trust” PBT “Section
79 plans" “Sterling Benefit Plan” Benistar “SADI Trust”
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419” “Niche 419” “Sea Nine Veba” “Lance Wallach”
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agent” “insurance agent lawsuit"
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Late breaking news: Large 419 plan files for Bankruptcy.
Recent court cases and other developments have highlighted serious problems in plans, popularly know as
Benistar, issued by Nova Benefit Plans of Simsbury, Connecticut. Recently unsealed IRS criminal case
information now raises concerns with other plans as well. If you have any type plan issued by NOVA Benefit
Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, get help
at once. You may be subject to an audit or in some cases, criminal prosecution.
On November 17th, 59 pages of search warrant materials were unsealed in the Nova Benefit Plans litigation
currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the
IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to
Impede the IRS and Assisting in the Preparation of False Income Tax Returns. Read more here.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section
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. Read more here
Accounting Today July 2011
Accountants, insurance professionals and others need to be careful that they
don’t become what the IRS calls material advisors. If they sell or give advice,
or sign tax returns for abusive, listed or similar plans; they risk a minimum
$100,000 fine. Their client will then probably sue them after having dealt with
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized
the retirement benefit plan administration firm’s files and records. In McGehee
Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in
an employee benefit plan marketed under the name “Benistar” was a listed
transaction because it was substantially similar to the transaction described in
Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the
court has ruled against the Benistar welfare benefit plan, by denominating it a
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and
claimed deductions for contributions to it in 2002 and 2005. The returns did
not include a Form 8886, Reportable Transaction Disclosure Statement, or
similar disclosure. The IRS disallowed the latter deduction and adjusted the
2004 return of shareholder Robert Prosser and his wife to include the $50,000
payment to the plan. Click here to read more.
Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for Small
Business by Lance Wallach
The 1993 tax law changed the amount allowable as a deduction for business meals and
entertainment expenses incurred after. In addition, some special rules were enacted into
the tax law. The limitation for deducting such expenses incurred after December 31, 1993
is 50%. Accordingly, after the general rules and exceptions are applied to meals and
entertainment expenses incurred and the total dollar amount is determined, the 50% rule
must then be applied. Business people must keep current with such rules or face the
wrath of the IRS. The purpose of this chapter is to explain the general rule, the
exceptions, and the special rules that are in effect for all business meals and entertainment
expenses. Read more here
How to Avoid IRS Fines for You and Your Clients
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents,
including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a
large tax deduction; the insurance agent is motivated by a substantial commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-
called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance
agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants who signed a tax
return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you. Read more here!
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
Offshore International Today Aug 2011
You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure
Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be prosecuted. They are
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted.
Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003. How much money
does the IRS say he hid? A whopping $90,000. That’s it.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out
the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was
wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that
could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also
fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%. Don’t want this to happen to you?
Visit taxadvisorexpert.com today!
Our tax resolution offices have received calls regarding the following companies or
: CJA, CJA and Associates
By Lance Wallach June
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or reportable transactions, or substantially
similar to such transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under the name
“Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family
Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by
McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee
opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS is cracking down on small business
owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust arrangements sold to companies that were
designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were
tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted
for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section 419A for certain “10-or-more employers” welfare benefit funds.
In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10% of the total
contributions, and the plan must not be experience-rated with respect to individual employers.
According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is
that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust
administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often
designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of
other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.
Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment listed in its
advertising packet included:
· Virtually unlimited deductions for the employer;
· Contributions could vary from year to year;
· Benefits could be provided to one or more key executives on a selective basis;
· No need to provide benefits to rank-and-file employees;
· Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
· Funds inside the plan would accumulate tax-free;
· Beneficiaries could receive death proceeds free of both income tax and estate tax;
· The program could be arranged for tax-free distribution at a later date;
· Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the court heavily cited Curcio, in which
the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to the cost of
the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could receive the value
reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of
the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in
estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume
a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886,
Reportable Transaction Disclosure Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS also assessed
tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a
reasonable cause or good faith exception.
More you should know:
· In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay.
Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13,
2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or
more and the employer has deducted the premiums for the insurance.
· A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
· An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
· Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited
and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of
disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly
disclosing their participation in listed, reportable or similar transactions; an issue that was not before the Tax Court in either Curcio or McGehee. The disclosure needs to be made for
every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did
disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants file forms, and they still all
received very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section 79 plans.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive
tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions
annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s
All Things Considered, and others. Lance has written numerous books including 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 the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, firstname.lastname@example.org or visit www.vebaplan.
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
Massachusetts Society of Certified Public Accounts, Inc.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A
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.
"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."
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.
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.
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.
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.
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 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.
Contact him at:
Want to know your Attorney's dirty little secret?
What your attorney won't tell you is that they know NOTHING about the 419, 412 or other similar insurance based benefit plan that you are stuck in!!
Our office gets calls every week from attorneys all over the country asking for our expert advice and assistance with the 419, 412 clients they have just duped into believing they are
in good hands with them!
Why deal with these ambulance chasing lawyers who have no deep working knowledge of these plans which are being attacked by the IRS and are just jumping on the latest financial
news story they just read about!
We are the nation's leading experts in this area of the law and have assembled a top notch team of Former IRS agents, CPAs, insurance plan experts who have never lost a case in
court, and attorneys who will in most cases work on a contingency basis so you don't have to take a second mortgage out to pay your ambulance chasing lawyer his fee up front!!
Stop dealing with KNOW NOTHING middlemen attorneys and call the experts that the attorneys call when they find themselves over their heads in this complex area of the law!!
National Conference of CPA Practitioners
National Society of Accountants Speaker of the Year
Baruch College (CUNY), Baruch College Graduate School
The American College – Chartered Financial Consultant (ChFC)
The American College – Chartered Life Underwriter (CLU)
The Institute for Investment Management Consultants – Certified Investment Management Consultant (CIMC)
Guest Lecturer For
Baruch College (Taxes on Tuesdays); Long Island University, C.W. Post Graduate School of Accountancy.
Speaker at more than 20 conventions yearly, including the annual national conventions of the American Association of Attorney - Certified Public Accountants,
National Society of Accountants, National Network of Estate Planning Attorneys, National Association of Tax Practitioners, National Association of Enrolled
Agents, National Association of Health Underwriters, American Society of Pension Actuaries, Employee Benefits Expo, Health Insurance Underwriters, NAPFA,
NAIFA, FPA, NABA, ALPFA, various state CPA societies, Tax Institutes, as well as medical and insurance conventions, before CLU Societies, CPA/Law Forums
throughout the United States, and Estate Planning seminars.
Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans,
financial and estate planning, reducing health insurance costs, and tax-oriented strategies at accounting and financial planning conventions. He has authored
numerous books including The Team Approach to Tax, Financial and Estate Planning, Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots, and Sid Kess’ Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the AICPA, and Wealth
Preservation Planning by the National Society of Accountants. His newest books CPAs’ Guide to Life Insurance and CPAs’ Guide to Federal and Estate Gift
Taxation will be published this spring by Bisk CPEasy.
Mr. Wallach has written for numerous publications including the AIPCA Journal of Accountancy, AICPA Planner, Accounting Today, CPA Journal, Enrolled
Agents Journal, Financial Planning, Registered Representative, Tax Practitioners Journal, CPA/Law Forum, Employee Benefit News, Health Underwriter, Advisor
and the American Medical Association News. Mr. Wallach is listed in Who’s Who in Finance and Industry and has been featured on television and radio financial
talk shows, including National Public Radio’s "All Things Considered" and NBC television, etc.
Lance Wallach has worked on behalf of Expert Witness and Advisory Services clients throughout the United States.
Lance provides Expert Witness Services as a consulting and/or designated Expert.
Lance Wallach’s clients have a variety of litigation and arbitration concerns involving economic damages, insurance, pension plans, welfare benefit plans, financial
planning, and tax matters.
These concerns involve technical and complex subject matter. Lance works directly with clients on all matters; his professional services are never out sourced.
Lance provides Expert Witness Services on behalf of both defendants/respondents and plaintiffs/complainants.
As an expert witness Lance Wallach’s side has never lost a case.
419 and 412 Plan Fraud
You think you know what you are getting when you buy an insurance plan, but what do you do when you find out that your plan does not work they way you
thought? If you have been misled by your insurance broker, you may have been the victim of fraud. We protect the rights of the victims of 419 and 412 plan fraud.
Have you purchased an IRC 419 Employee Welfare Benefit Plan after being told the contributions were fully deductible from federal and state income taxes, only
to find out that this was not the case?
Did you purchase a trust you may not have needed, funded with substantial amounts of life insurance because you were told you could build up cash value tax-free
and then have use of the funds tax-free?
If you have been misled about information regarding your employee welfare benefits, you may have been the victim of 419 and 412 plan fraud.
When consumers are misled and given false information by insurance brokers, they have the right to sue the fraudulent agents and insurance company that sold
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American
Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other
tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional
articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should
contact an appropriate professional for any such advice.
Group Term Life Insurance and Imputed Income: Do You Have It Right?
Many, if not most, employers make group term life insurance available to their employees on their own lives and, often, on the lives of their dependents. Coverage may be paid
for by the employer, the employee, or both, and, if paid by the employee, premium contributions may be made pre-tax or after-tax. The income tax rules attached to this very
common employee benefit, however, are, in our experience, less well understood than you might think. Understanding these rules and a thoughtful plan design can help minimize
adverse tax consequences. The following summarizes some of the aspects of group term life insurance that employers may want to consider in structuring life insurance benefits.
This information is provided for purposes of general education; it should not be construed as legal or tax advice, and employers and employees or other plan participants are
urged to consult their qualified advisors regarding the specific consequences of the applicable tax and other rules.
Things to remember about group term life insurance:
• Employer-paid coverage of more than $50,000 on the life of an employee may cause income to be imputed to the employee under Section 79 of the IRC
• There is no exclusion from gross income for coverage on the life of a spouse or other dependent unless it is employer-provided and $2,000 or less; Code Section 79 does not
apply to dependent coverage, which is instead taxed under Code Section 61, and the cost of the dependent coverage may be imputed as income to the employee
• A plan that is 100% employee-paid may still cause income to be imputed under Code Section 79 if the plan’s premium rates “straddle” the IRS uniform monthly premium rates
• In determining the cost of insurance under the uniform premium rates, employers are required to use each employee’s and/or dependent’s age attained as of 12/31 of the year
for which the calculation is being made; costs are prorated for coverage of less than a complete month
• Optional employee life insurance may be paid for with pre-tax contributions if there is also a cafeteria plan in place; remember that pre-tax contributions are treated as
employer contributions, so that the insurance would be provided by the employer and coverage over $50,000 subject to imputed income even if there is no straddling
©2012 Pacific Resources Benefits Advisors, LLC
• Optional dependent coverage is not a qualified benefit under a cafeteria plan and must always be paid for with after-tax contributions
• FICA and Medicare taxes are required to be paid and withheld on income that is imputed to active employees on account of group term life insurance coverage; if the
employees are terminated or retired, they must pay those taxes themselves, although the employer must still withhold its portion
Internal Revenue Code Section 79. Under Section 79 of the Internal Revenue Code, employees may exclude from their gross income up to $50,000 (plus the amount, if any, of
their after-tax contributions for coverage) of group term life insurance provided by an employer. The cost or value of the life insurance coverage (not the premium), in excess of
$50,000 is imputed as income to the employee, and FICA and Medicare taxes must be paid and withheld on those amounts (and paid, but not withheld, for terminated or retired
employees who might be covered.) The exclusion is based on the employee’s tax year; an employee covered under multiple policies provided by the employer would have only
one $50,000 exclusion under Code Section 79 for the year. The value of life insurance coverage is determined using the age-banded Table 1 uniform premiums/$1,000 of monthly
coverage provided under Dep’t of Treasury Regulations Section 1.79-3 (popularly referred to as the “Table 1 Rates”.) Under the regulations, an employee’s age for any year is
the age attained as of December 31. The IRS significantly lowered the Table 1 Rates in 1999 but they remain higher than most group premium rates, so that it is relatively
common for participants to have income imputed to them for this benefit. Life insurance provided to an employee can qualify as group term life insurance subject to Code
Section 79 if it is:
• provided under a policy ‘carried directly or indirectly by an employer’ to
• a group of employees (generally more than 10 and including former and retired employees, but excluding directors and partners), and
• the policy death benefits are excludible from gross income under Code Section 101(a)(1); that is, they are received under a life insurance contract and paid by reason of the
death of the insured (thus, neither the portion of employer-paid premiums attributable to, nor the value of, travel or accidental death benefits are excludible from gross income
under Code Section 79), and
• the amount of insurance provided to each employee must be computed under a formula that precludes individual selection, which, under the applicable regulations, means it can
be based on age, years of service, compensation (including multiples of salary) or position.
This insurance company pitch forgot to discuss that section 79 plans get audited by the IRS.
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.