"Welfare Benefit Plan" tax schemes are gaining popularity among sole proprietors about like crack cocaine, and they promise to be much more harmful to their health.
As we all know, businesses that provide benefits to their employees, such as health care and insurance, write the costs of those welfare benefit programs off on their taxes. Welfare Benefit Plan tax schemes are promoted as a way for sole proprietors to do the same thing, providing their favorite employee (themselves) with cleverly crafted welfare benefits, writing the costs of those benefits off as tax deductions. So, as the scheme goes, you pump massive amounts of income into a cash value life insurance policy, deducting those premiums as a tax deduction, while building a cash value that you can later cash out, or borrow against, "tax free." The promoters of these schemes generally explain (with a wink and a nod) that when you begin to cash out, you have an obligation to report that money as income, because insurance policy proceeds are not generally taxable, and these withdrawals are not reportable by the issuer of the policy.
In other words, these Welfare Benefit Plans are promoted to be like some special IRA that you can put all the money in you want, write the contributions off your taxes, and pull the money out later without any notification to the IRS . . . unless you tell them.
Internal Revenue Code Sections 419, and 419A, define the rules allowing employers to make tax deductible contributions to Welfare Benefit Plans, in order to provide their employees with medical and life insurance benefits. There is nothing inherently wrong with these plans; the IRS acknowledges that businesses often maintain welfare benefit funds that fully comply with the intent of Sections 419 and 419A and, in fact, provide meaningful medical and life insurance benefits to their employees, making substantial contributions to those funds that the IRS accepts as fully deductible.
"Welfare Benefit Plan" tax schemes are gaining popularity among sole proprietors about like crack cocaine, and they promise to be much more harmful to their health.
ReplyDeleteAs we all know, businesses that provide benefits to their employees, such as health care and insurance, write the costs of those welfare benefit programs off on their taxes. Welfare Benefit Plan tax schemes are promoted as a way for sole proprietors to do the same thing, providing their favorite employee (themselves) with cleverly crafted welfare benefits, writing the costs of those benefits off as tax deductions. So, as the scheme goes, you pump massive amounts of income into a cash value life insurance policy, deducting those premiums as a tax deduction, while building a cash value that you can later cash out, or borrow against, "tax free." The promoters of these schemes generally explain (with a wink and a nod) that when you begin to cash out, you have an obligation to report that money as income, because insurance policy proceeds are not generally taxable, and these withdrawals are not reportable by the issuer of the policy.
In other words, these Welfare Benefit Plans are promoted to be like some special IRA that you can put all the money in you want, write the contributions off your taxes, and pull the money out later without any notification to the IRS . . . unless you tell them.
Internal Revenue Code Sections 419, and 419A, define the rules allowing employers to make tax deductible contributions to Welfare Benefit Plans, in order to provide their employees with medical and life insurance benefits. There is nothing inherently wrong with these plans; the IRS acknowledges that businesses often maintain welfare benefit funds that fully comply with the intent of Sections 419 and 419A and, in fact, provide meaningful medical and life insurance benefits to their employees, making substantial contributions to those funds that the IRS accepts as fully deductible.
On the other hand, the IRS does tak