The article in the September issue of the JofA by Lance Wallach, CLU, (“Abusive Insurance and Retirement Plans,” page 34) sounding the alarm against the use of 419(e) plans inaccurately analyzes an October 2007 revenue ruling and two IRS notices.
Mr. Wallach accurately reports that Notice 2007-83 “identified certain trust arrangements involving cash-value life insurance policies…as listed transactions.” In the next sentence he accurately states, “[Notice 2007-84] similarly warned against certain post-retirement medical and life insurance benefit arrangements” (emphasis added). But two half-truths do not a whole truth make. The juxtaposition of these sentences makes it seem as if post-retirement medical benefit plans are listed transactions. They are not. In fact, Notice 2007-84 generally praised such plans that are organized and operated properly, which Mr. Wallach fails to mention. He also fails to mention, but implies otherwise, that the Service never prohibited in Notice 2007-84 or elsewhere the use of life insurance as a funding mechanism for such plans.
Mr. Wallach also implies in his discussion of Revenue Ruling 2007-65 that the denial of deductions under section 264(a) applies to all welfare benefit plans and all benefits. This is not true. Sections 419 and 419A calculate permissible deductions in two ways. One uses qualified direct cost (QDC), which governs the calculation of deductions for contributions for preretirement death benefits. The other uses qualified asset accounts (QAAs), which govern the calculation of deductions for contributions for, among other things, post-retirement medical and death benefits. Revenue Ruling 2007-65 addresses only QDC. The Service does not—and cannot, based on current law, precedent or legislative history—apply section 264(a) to the calculation of QAA. By referring only to QDC, Mr. Wallach tells only half of this complicated story, potentially misleading readers who do not specialize in welfare benefit plans. Plans offering post-retirement medical benefits can be funded with cash-value life insurance, and the contributions can be deducted, notwithstanding the Service’s novel and unprecedented application of section 264(a) to QDC and preretirement death benefits.
There is no question that there are abusive 419(e) plans and abusive VEBA plans that should be shut down. But that does not make all plans abusive. Better advice within your pages would not only caution readers about such plans but also educate them on how to identify compliant ones. Half the story does not educate; it just frightens CPAs who may unnecessarily steer clients away from valid and valuable planning opportunities. Your readers deserve accurate reporting and analysis by those qualified to provide it so they can exercise their own educated professional judgment.
David Neufeld, Esq., LL.M. (Tax)
Author’s reply: My article was not intended for specialists who have LL.M. degrees, but for rank-and-file practitioners who may run across welfare benefit plans. Mr. Neufeld is partially correct in several of the points he makes, that is, the retiree medical plans are not proscribed, that cash-value insurance is not prohibited, that deductions for all welfare benefit plans are not denied, etc. However, the vast majority of welfare benefit plans I have seen are not of the variety that Mr. Neufeld describes, but are plans concocted for the purpose of selling cash-value life insurance products and should be avoided. My goal was not to provide a comprehensive look at welfare benefit plans so that general practitioners can become expert enough to recommend legal arrangements, but to warn those practitioners so that they can spot a potential problem for themselves and for their clients. If they come across such a plan and need assistance determining whether it complies with tax laws, they should engage an expert who specializes in such plans. I have seen only one plan that my associates and I believe may be in full compliance with the tax laws. I will happily share information about it with anyone at firstname.lastname@example.org or 516-938-5007.
Lance Wallach, CLU, ChFC, CIMC