419 Plan Welfare Benefit Trust

We have attempted to take a complex tax topic and present it to you in an easy-to-read format.  Certainly you may have questions that do not get answered here.  Likewise, you may desire more detail about certain aspects of the discussion.  We are not claiming to answer all of your questions in this summary.  What we are attempting to do is answer some very important questions regarding Welfare Benefit Trusts, help the taxpayer avoid mistakes in deciding if a Welfare Benefit Trust would be a benefit, and clarify some of the rumors regarding these Trusts.

We have found section 419 and 419A of the Internal Revenue code and its subsections 419A(f)(6) and 419e, to be misunderstood by many tax professionals.  We can only assume that this is because it is such a small topic in the volumes of tax code.  Tax section 401k would be an opposite example.  There are legal and tax professionals whose sole focus is section 401k and who deal only in issues regarding section 401k.  In fact, most Americans—tax professionals or not—are familiar with section 401k because it is offered to over half of the American workforce. Section 419 is not offered so broadly.  In general, you will not have an opportunity to take advantage of section 419 unless you own a profitable corporation.

If a Trust is constructed properly, and if the funding of the Trust is designed properly, then the participant is at very little risk of challenge by the IRS and both expectations and results should be the same.

What is a Welfare Benefit Trust?

It is a Trust set up under IRC 419A(f)(6), multiemployer trust, or IRC 419(e), single employer trust.  The purpose of the Trust is to provide certain Welfare Benefits to the participants named in the Trust.

What are Welfare Benefits?

They have nothing to do with welfare.  They include insurances such as life, health, disability, and long-term care as well as severance and education funding.

What is 419?

This is the section of the Internal Revenue code that details the requirements to qualify as a bonafide Welfare Benefit Trust.  What makes the code difficult to understand is that sections 419 and 419A tell you everything that you are not allowed to deduct; however, in reading further, section 419A(f)(6) defines how sections 419 and 419A may not apply to you and in fact it is section 419A(f)(6) that makes contributions to Welfare Benefit Trusts tax deductible.

Are Welfare Benefit Plans legal?

They are legal to the degree that when the Plan is established it is in compliance with IRC sections 419A(f)(6) or 419(e).  We are often surprised by this question simply because there would not be a tax code for something that is not legal.  In fairness, there are Welfare Benefit Plans that comply with the tax code and there are those which do not.

What is the controversy about Welfare Benefit Plans?

In short, the issue is deferred compensation.  Welfare Benefit Trusts were never intended to be deferred compensation plans.  The tax-deductions were made available by The Treasury as an incentive for business owners to fund their own insurance needs.  Not for retirement.

How is a Welfare Benefit Trust funded?

It is funded with life insurance and annuities that are issued by several of the largest insurance companies in the US. Stocks, bonds, mutual funds and Certificates of Deposit should not be used to fund a Welfare Benefit Trust.  The idea behind Welfare Benefit Trusts is to provide Welfare Benefits, not investments.

Is the money deposited into a Welfare Benefit Trust tax deductible?

In order to qualify as a tax deduction, there are a few requirements of the Trust.  In the case of section 419A(f)(6),  the Trust must have at least 10 participating employers.  Additionally, none of the participating employers can contribute more than 10% of the plan assets.  If these guidelines are followed, then the contribution should qualify as tax deductible at the corporate level.  In the case of section 419(e) the deductibility will be based on the Qualified Direct Cost for the specific participant.  Simply put, the deductibility will be based on a participant’s age, contribution amount and benefits applied for.  In the case of participants in their 30s and 40s you may see a 50% to 60% deduction.  For older ages 60+, you may find the contribution to be 100% deductible.  The Qualified Direct Cost will be based on the administrator’s insurance tables.

What is the IRS’s position on Welfare Benefit Trusts?

While we cannot speak for the IRS, we will point out that they have posted a letter of warning regarding Welfare Benefit Trusts on their website.  As tax professionals understand, the Service is in the business of collecting taxes not educating the general public in how to defer them.  The IRS has never stated that contributions to a properly constructed Welfare Benefit Trust are not deductible.  In reading between the lines, the Service is telling the tax payer not to abuse the opportunity with abuse being “experience rating” and having at least 10 participants.  An experienced administrator should be able to provide assurance that their Welfare Benefit Trust complies with current regulations.

What is a SAS70?

This is an audit, performed by an independent third party, of the internal accounting and reporting procedures of a Trust administrator.  It is our suggestion that you request a copy of your administrator’s SAS70.  You may not understand everything it says but it adds a lot of credibility when a major accounting firm has reviewed the internal practices of your Welfare Benefit Trust administrator. Beware of Trust administrators who cannot produce a SAS70.

Who is involved in a Welfare Benefit Trust?

Not all situations are the same, but there will often be a tax consultant, an insurance professional and a Welfare Benefit Trust administrator involved in your plan.

Where is the tax deduction taken?

For S-corporations the deduction is recorded on line 18, Employee Benefits.  For C-corporations the deduction is recorded on line 24.

Are the assets protected from creditors?

Yes, assets in Welfare Benefits Trusts are protected from creditors.

Is a business required to include all employees in a Welfare Benefit Trust?

No, there are no requirements to include employees in a Welfare Benefit Trust.  We most often see only the owners participating in Welfare Benefit Plans.

Application of a Welfare Benefit Trust:

We cannot comment on every possible application or motivation for participating in a Welfare benefit Trust.  Here we will discuss some of the most beneficial aspects of a Welfare Benefit Trust.  For estate planning, a Welfare Benefit Trust may be the most tax-efficient way to protect an estate from the Federal estate tax.  When using a Welfare Benefit Trust to purchase life insurance, the premiums can be completely tax deductible.  If the beneficiary of the death benefit is an irrevocable trust, the benefits will be received outside of the taxable estate.  For providing a multitude of protective insurances—life, health, disability, long-term care, college tuition payments and severance—on a selective and tax-deductible basis, a Welfare Benefit Plan is superior to after-tax funding of equal benefits.

If you would like to discuss your specific situation in either joining a Welfare Benefit Trust
or terminating from an existing Welfare Benefit Trust Contact Us Today!

5830 Oberlin Drive, Suite 304
San Diego, CA 92121
Phone: 800-731-8122
info@proplanusa.com