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Jenny Blackey

on 4 January 2013

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Transcript of RPT

Welfare Benefit Plan
-Enacted in 1928
-419 and 419A added to IRC in 1984
-Deductible Expenses Must Be Related to “welfare”:death, disease, and disability
-Deductions Must Not Exceed Current Year’s “Qualified Cost”. . . except . . . -419A(f)(5) is a Union Plan and has Over 70 Private Letter Rulings from the IRS (NFL)
-419A(f)(6) the Multiple Employer Plan
-IRS’s key target
-Abusive plans eliminated July 17, 2003, IRS notice
-The majority of early 419 abuses and bad press 419(e)
Single Employer Welfare Benefit Plans
-A separate “fund”/trust is set up for each employer
-Tax deductible contributions for welfare benefits:
death, disease, and disability
-Must comply with the account limits set forth in IRC
419 and 419A Mistakes Defining “Current Qualified Cost”
-Term-for-life/Term-to- Age 65
-Creates a reserve over the working life of an employee -IRC 419A(c)(2)
-Only includes key personnel/owners
-Does not comply with IRC 505(b)-IRC 419A(e)(1)
-Oops!! IRC 4976 - 100% excise tax
-Welfare benefit plans that ignore split dollar regulation (Table 2001)
-Cost basis not established on 83(b) election with a probative trace
-Individual ownership
-Deferred compensation is part of the welfare benefit plan
-What determines non-discriminatory? Playing By The Rules
-Term-for-life/Age 65 model must be non-discriminatory Comply with IRC 505(b)
-Must use IRC 83 to comply with split dollar regulation and distinguish death benefit trust from restricted property/deferred compensation (IRC 409A)
-Probative trace on 83(b) property to establish cost basis
-If you are deducting the Qualified cost it cannot be more than the Current cost of the Current death benefit.
-UL and VUL?
-Whole Life definition of base premium?
-Patent-Pending Method for defining qualified direct cost:
-Filing # 11/584,687
-Publication #US-2007-00949054-A1
-The Restricted Property Trust is designed to work within all IRS guidelines. October 2007 IRS Notices 2007-83 & 2007-84, Revenue Ruling 2007-65 -These Notices basically shut down all life insurance driven welfare benefit planning in the US.
-The IRS included ANY cash value life insurance in the notice.
-What now?
-File Plans with the IRS and wait for audit results. OCC Memorandum
Did the employer pay artificially high insurance premiums, in excess of the cost of the current life insurance protection? New IRS Guidelines
Provide a Road map for the RPT Plan
-Do the owner-employees report only a small amount of income with respect to the life insurance coverage?
-Can an employee get at the cash value in that policy?
-If the answers to one or more of the questions are yes, then it is likely the above arrangement is not a welfare benefit fund. Advantages
-Tax deductible contributions
-Asset protected wealth accumulation
-Accessible prior to age 59 1/2
-Death benefit
-Buy/sell agreements
-Estate planning Disadvantages
-5 year minimum commitment
-Contributions have low flexibility
-Cash is not accessible while participating
-Must qualify for coverage (health)
-Must use life insurance as funding vehicle Plan in Action
-Client age 52 in good health
-Contributes $100,000 annually
-Corporation receives 100% deduction under 162 and 83(h)
-$60,000 is currently non-taxable *Taxable to the employee as income. Table 2001 rate of $4,030 and the $40,000 will be taxable to the employee as income. Approximate income tax-free portion of the cash value: $786,183 ~ By: Crabb Financial, LLC. End Result Year 5
-$412,080 cash value
-$3,140,196 death benefit
-$300,000 net current deductions
-69% of CV in policy not taxable on transfer
-3.8% Rate of Return*
-Based on current dividend rates and using current assumptions.
-Compared to a fixed-income portfolio. End Result Year 10
-$1,094,471 accumulated cash
-$3,751,937 death benefit
-$600,000 net tax deductions
-71% of cash value income tax-free
-8.4% Rate of Return*
-Risk of Corporate bond
-Return is net of insurance costs
-Based on current dividend rates and current assumptions.
-This represents the gross rate of return needed in a fixed-income portfolio. The Set-up
-Trust Fees: $5,000 plus $1,000/participant
-Trustee Fees: $1,000 set up fee $500/yr. per policy Do You Meet the Criteria? Court Cases
-Cadwell v. Commissioner:
-This case specifically addressed what constitutes a substantial risk of forfeiture, PERC valuation, and mathematically combines the cost of current coverage plus administrative expenses.
-Curcio v. Commissioner:
-A landmark 2010 court case that determined the fate of the Benistar welfare benefit plan design.  Please request the RPT vs. Benistar comparison document.
-Wells Fargo v. Commissioner:
-Single employer 419 case.
-Post-retirement health insurance case.
-Neonatology v. Commissioner:
-419A(f)(6) case where term insurance was over funded by 400x.
-Square D. V. Commissioner:
-419 costs protected by 419A must relate to qualified direct costs.
-Lima surgical v. US:
-Termination for any reason, i.e. “Trigger”, can cause contribution to not be deductible.
-Booth v. Commissioner:
-419A(f)(6), to be protected under 419A, must be aggregate rather than separate, and cannot be experience rated.
-Parker-Hannifin v. Commissioner:
-How not to fund a 419A(f)(5).
-Moser v. Commissioner:
-The first big victory for 419 supporters after 1984.
-A single employer VEBA.
-Connecticut mutual life v. Commissioner:
-substantial future benefits prohibit contribution from being deductible.
-Schneider v. Commissioner:
-419A(f)(5) case allowing a $1.1million contribution as deductible to a 419-VEBA, 501(c)(9).
-Wellons v commissioner:
-Severance benefits show deferred compensation and is not allowed in 419.
-Greensboro pathology v. US:
-A proper 419 cannot offer deferred compensation.
-Grant-Jacoby v. Commissioner:
-Deferred compensation is not deductible when operating a 419 plan. IRS Codes & Regulations
-61, 72, 83, 101, 105, 106, 162, 264, 401, 402, 404, 409A, 415, 419, 419A, 501, 505, 2035, 2042, 4975, 4976
-Treasury regulations:
-1.72-16, 1.79-3, 1.162-10(a), 1.61-22
-Department of Labor regulations:
-2520-104, 2520-104.20, 1-419-t
-General Counsel Memorandum:
-IRS Notices:-2007-83, 2007-84
-Revenue Ruling:
-2007-65-GCM # 200931049, UILC:-419.14-00, 419.12-02, 419.00-00, 419.03-00
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