IRS
GOES FOR DEATH BLOW AGAINST
ABUSIVE WELFARE BENEFIT PLANS
Does IRS hate all welfare
benefit plans? No, but they
apparently have a serious bias
against those plans purporting
to comply with IRC section
419A(f)(6). In a pair of moves
recently IRS has acted to
eliminate such arrangements. In
Notice 2000-15 and Notice
2001-51, IRS published its view
that such arrangements are
“potentially abusive tax
shelters”. As such,
participation in such
arrangements must be reported to
IRS on an attachment to the tax
return of the corporation
participating in such an
arrangement.
Under new regulations, the
disclosure requirements apply to
individuals who participate in
such arrangements, and the tax
effect test of Notice 2000-15
has been eliminated, thus
requiring all such arrangements
to be disclosed. In addition,
proposed regulations promulgated
under IRC section 419A(f)(6)
(finally!) have closed the door
on variations between employers
and products.
The proposed regulations rehash
the requirements of section
419A(f)(6) and add the following
additional requirements: (1)
plan document must require the
Administrator to maintain
records verifying compliance
with section 419A(f)(6), and (2)
the IRS and participating
employers (or their
representatives) must have the
right to examine and copy all
such records.
In one new position the IRS
claims that all life insurance
premiums must be based on
current age, thus eliminating
both individual term and cash
value life insurance policies.
And in a laughable position,
IRS, in one of the examples,
claims that life insurance cash
values are the reason that
renewal premiums are lower than
initial premiums. The examples
demonstrate IRS’s view that the
only benefits that comply with
the proposed regulations are
those that could be provided and
tax-deducted without section
419A(f)(6).
While Congress apparently meant
to leave the door open for
something under section
419A(f)(6), IRS means to close
it to everything. Do the
Committee Reports under
419A(f)(6) say anything about
“tax shelters”? No, they speak
about multiple-employer welfare
benefits plans and the
conditions under which Congress
intended to authorize them.
Apparently Congress forgot to
check with IRS first.
The irony is that as far as the
new “blunderbuss” regulations
and Notices go in attempting to
curtain abusive arrangements,
their efforts will have little
effect in the marketplace. The
Notices and regulations do not
address abusive arrangements
purporting to exist under IRC
section 419A(f)(5), so those
promoters of former 419A(f)(6)
arrangements will simply change
the Code section to 419A(f)(5)
and enter into an agreement with
(bribe?) a union to jointly
sponsor such a plan. Although
IRS may argue that such
arrangement is “similar to”
419A(f)(6) plans, opinion
letters are already being
provided that assure the public
that such arrangements are
“substantially dissimilar to
those” potentially abusive tax
shelters existing under
419A(f)(6).
The Bush administration’s IRS
used all their ammo to eliminate
a varmint once and for all, but
like the elusive Osama bin Ladin,
abusive welfare benefit
arrangements will simply move
and take another form. |
