Beware: 419 plans with life insurance are still on the marketBlog added by Roccy DeFrancesco on July 12, 2012
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

419 welfare benefit plans just won’t die.

I was just forwarded a brand new promotional piece by an insurance marketing organization pitching 419 plans with life insurance. It’s just amazing, and it’s the reason I decided to write this blog: to warn readers about it and recommend you to stay away from these plans.

What is a 419 plan?

It’s an employee benefit plan that was designed to allow business owners to tax deduct the purchase of cash value life insurance where in retirement, the plan would be terminated and the policies would revert to the owners, at which time they would take tax-free loans from the policy.

The IRS killed 419 plans

These plans were abused so much over time that the IRS has acted several times to try to kill them. Their attempts were not really successful until Notices 2007-65, 2007-83 and 2007-84 were passed. What the notices essentially say is that, if an employer funded a 419 or VEBA Plan with life insurance, the payment is not deductible. Not only that, but plans that use cash value life insurance were put on the listed tax-transaction list. So, it’s truly amazing that at least one marketing organization is trying to bring back these plans.

The new plan I’ve seen pitched is using these plans to fund in a tax-favorable manner for post-retirement medical expenses. With the advent of 401(h) plans, there is no need to use these 419 plans for post-retirement medical benefits. If a client wants to build wealth with a tax-favorable structure, I recommend looking at a captive insurance company (CIC).

The bottom line with 419 plans: Do not use them.
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