Showing posts with label Captive Insurance Plan. Show all posts
Showing posts with label Captive Insurance Plan. Show all posts
Section 79 - HG.org
For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company).
Beginning this article, I wanted to reiterate my comments on implementing plans with fewer than 10 employees.
Amazingly, one of the insurance companies offering this plan seemly doesn't have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you'll want to stay far away from.
As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan.
Amazingly, one of the insurance companies offering this plan seemly doesn't have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you'll want to stay far away from.
As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan.
Tax Expert Lance Wallach Speaking at Attorney CPA Convention - Video Dailymotion
Tax Expert Lance Wallach Speaking at Attorney CPA Convention - Video Dailymotion
Tax Expert, Author, Expert Witness, Speaker Lance Wallach discussing tax audits, penalties, abusive tax shelters, 412i plans, 419e plans, 6707A plans, insurance fraud, listed transactions, etc. at convention. Contact him at 516-236-8440 for tax advice, and audit defense.
Tax Expert, Author, Expert Witness, Speaker Lance Wallach discussing tax audits, penalties, abusive tax shelters, 412i plans, 419e plans, 6707A plans, insurance fraud, listed transactions, etc. at convention. Contact him at 516-236-8440 for tax advice, and audit defense.
New BISK CPEasy™ CPE Self-Study Course
CPA’s Guide to Life Insurance
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Introduction
The CPA faces a daunting series of roles—those of advisor, practitioner, and consumer. Life insurance can be a powerful tool; improperly wielded, it can lead to malpractice.
The authors hope this text effectively introduces the advisor to basic and also more complex concepts, enabling the advisor to appropriately counsel clients, or at least spot pitfalls and client opportunities. Similarly, the authors hope the practitioner who is licensed and sells insurance is aware of the myriad options available and which best help the client. Finally, the authors hope the CPA as consumer gains an understanding of the important concepts that can help the CPA on a personal level.
This text and corresponding video was a daunting challenge—how to encapsulate the complex field of life insurance and its applications into an understandable and useful reference. The authors hope this was accomplished.
Program Learning Objectives
Upon successful completion of this program, the user should:
• Understand the basics of life insurance
• Have a general understanding in determining insurance needs
• Be aware of the major pros and cons of each type of insurance
• Be familiar with business related insurance
• Be familiar with “split-dollar insurance”
• Be familiar with foundational estate planning issues
• Understand how life insurance is used to protect the estate
• Understand basic buy-sell agreement theory (estate planning for the business)
• Understand basics about various retirement plans
• Understand alternatives to cashing out or terminating a policy
• Be familiar with how products are illustrated
• Have a general understanding of annuities
• Be aware of trouble areas
Prerequisite: None
Formats: Online, Software, Text $109.00/6 CPE Credit Hours
Formats: Audio w/text $119.00/8 CPE Credit Hours
Formats: DVD w/text $179.00/8 CPE Credit Hours
Bisk Education, Inc. • 9417 Princess Palm Avenue • Tampa, FL 33619-8313 • Phone 813-621-6200 • Fax 813-621-0127 • www.bisk.com • bisk@bisk.com
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Introduction
The CPA faces a daunting series of roles—those of advisor, practitioner, and consumer. Life insurance can be a powerful tool; improperly wielded, it can lead to malpractice.
The authors hope this text effectively introduces the advisor to basic and also more complex concepts, enabling the advisor to appropriately counsel clients, or at least spot pitfalls and client opportunities. Similarly, the authors hope the practitioner who is licensed and sells insurance is aware of the myriad options available and which best help the client. Finally, the authors hope the CPA as consumer gains an understanding of the important concepts that can help the CPA on a personal level.
This text and corresponding video was a daunting challenge—how to encapsulate the complex field of life insurance and its applications into an understandable and useful reference. The authors hope this was accomplished.
Program Learning Objectives
Upon successful completion of this program, the user should:
• Understand the basics of life insurance
• Have a general understanding in determining insurance needs
• Be aware of the major pros and cons of each type of insurance
• Be familiar with business related insurance
• Be familiar with “split-dollar insurance”
• Be familiar with foundational estate planning issues
• Understand how life insurance is used to protect the estate
• Understand basic buy-sell agreement theory (estate planning for the business)
• Understand basics about various retirement plans
• Understand alternatives to cashing out or terminating a policy
• Be familiar with how products are illustrated
• Have a general understanding of annuities
• Be aware of trouble areas
Prerequisite: None
Formats: Online, Software, Text $109.00/6 CPE Credit Hours
Formats: Audio w/text $119.00/8 CPE Credit Hours
Formats: DVD w/text $179.00/8 CPE Credit Hours
Bisk Education, Inc. • 9417 Princess Palm Avenue • Tampa, FL 33619-8313 • Phone 813-621-6200 • Fax 813-621-0127 • www.bisk.com • bisk@bisk.com
Could We Have This Debate Before It Is Too Late? - HG.org
Is the use of fully insured group health insurance products as stop-loss coverage for group health plans going to remain a viable solution?
The obvious question that follows is: Are State Departments of Insurance Compelled by the Affordable Care Act (ACA) To Limit Fully Insured Health Products to Minimum Essential Benefits?
Short answer is a resounding No. This is an intriguing question which is being hashed out across our land and I am sad to say that most DOIs are getting it wrong. Section 1301, Paragraph (b), 1, A, the ACA is very clear in its definition of a health plan:
1) Health Plans—
(A) In General.—the term ‘‘health plan’’ means health insurance coverage and a group health plan.
Did that come through? “And a group health plan”.
One of the things that came out of the ACA, which I only hear complaining about, is the Medical Loss Ratio (MLR) mandate; 80% of small group (99 and under) and 85% of large group premium dollars must go to fund patient care. This puts fully insured products in the strange position of being underpriced as a stop-loss product.
Short answer is a resounding No. This is an intriguing question which is being hashed out across our land and I am sad to say that most DOIs are getting it wrong. Section 1301, Paragraph (b), 1, A, the ACA is very clear in its definition of a health plan:
1) Health Plans—
(A) In General.—the term ‘‘health plan’’ means health insurance coverage and a group health plan.
Did that come through? “And a group health plan”.
One of the things that came out of the ACA, which I only hear complaining about, is the Medical Loss Ratio (MLR) mandate; 80% of small group (99 and under) and 85% of large group premium dollars must go to fund patient care. This puts fully insured products in the strange position of being underpriced as a stop-loss product.
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
IRS Audits 419, 412i, Captive Insurance Plans With Life
Insurance, and Section 79 Scams
By Lance Wallach
June 2011
The IRS started auditing 419 plans in the ‘90s, and then
continued going after 412i and other plans that they considered abusive,
listed, or reportable transactions, or substantially similar to such
transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo
2010-115), the Tax Court ruled that an investment in an employee welfare
benefit plan was a listed transaction in that the transaction in question was
substantially similar to the transaction described in IRS Notice 95-34. A
subsequent case, McGehee Family Clinic, largely followed Curcio, though it was
technically decided on other grounds. The parties stipulated to be bound by
Curcio on the issue of whether the amounts paid by McGehee in connection with
the 419 Plan and Trust were deductible. Curcio did not appear to have been
decided yet at the time McGehee was argued. The McGehee opinion (Case No.
10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive
analysis and discussion of virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the
Service has disallowed deductions for contributions to these arrangements. The
IRS is cracking down on small business owners who participate in tax reduction
insurance plans and the brokers who sold them. Some of these plans include
defined benefit retirement plans, IRAs, or even 401(k) plans with life
insurance.
In order to fully grasp the severity of the situation, one
must have an understanding of Notice 95-34, which was issued in response to
trust arrangements sold to companies that were designed to provide deductible
benefits such as life insurance, disability and severance pay benefits. The
promoters of these arrangements claimed that all employer contributions were
tax-deductible when paid, by relying on the 10-or-more-employer exemption from
the IRC § 419 limits. It was claimed that permissible tax deductions were
unlimited in amount.
In general, contributions to a welfare benefit fund are not
fully deductible when paid. Sections 419 and 419A impose strict limits on the
amount of tax-deductible prefunding permitted for contributions to a welfare
benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and
Section 419A for certain “10-or-more employers” welfare benefit funds. In
general, for this exemption to apply, the fund must have more than one
contributing employer, of which no single employer can contribute more than 10%
of the total contributions, and the plan must not be experience-rated with
respect to individual employers.
According to the Notice, these arrangements typically
involve an investment in variable life or universal life insurance contracts on
the lives of the covered employees. The problem is that the employer
contributions are large relative to the cost of the amount of term insurance
that would be required to provide the death benefits under the arrangement, and
the trust administrator may obtain cash to pay benefits other than death
benefits, by such means as cashing in or withdrawing the cash value of the
insurance policies. The plans are also often designed so that a particular
employer’s contributions or its employees’ benefits may be determined in a way
that insulates the employer to a significant extent from the experience of
other subscribing employers. In general, the contributions and claimed tax
deductions tend to be disproportionate to the economic realities of the
arrangements.
The 419 plan advertised that enrollees should expect to
obtain the same type of tax benefits as listed in the transaction described in
Notice 95-34. The benefits of enrollment listed in its advertising packet
included:
Virtually unlimited deductions for the employer;
Contributions could vary from year to year;
Benefits could be provided to one or more key executives on
a selective basis;
No need to provide benefits to rank-and-file employees;
Contributions to the plan were not limited by qualified plan
rules and would not interfere with pension, profit sharing or 401(k) plans;
Funds inside the plan would accumulate tax-free;
Beneficiaries could receive death proceeds free of both
income tax and estate tax;
The program could be arranged for tax-free distribution at a
later date;
Funds in the plan were secure from the hands of creditors.
The Court said that the 419 Plan was factually similar to
the plans described in Notice 95-34 at all relevant times. In rendering its
decision the court heavily cited Curcio, in which the court also ruled in favor
of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable
or universal life policies, required large contributions relative to the cost
of the amount of term insurance that would be required to provide the death benefits
under the arrangement. The 419 Plan owned the insurance contracts.
The McGehee Family Clinic had enrolled in the 419 Plan in
May 2001 and claimed deductions for contributions to it in 2002 and 2005. The
returns did not include a Form 8886,Reportable Transaction Disclosure
Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the
2004 return of shareholder Robert Prosser and his wife to include the $50,000
payment to the plan. The IRS also assessed tax deficiencies and the enhanced
30% penalty totaling almost $21,000 against the clinic and $21,000 against the
Prossers. The court ruled that the Prossers failed to prove a reasonable cause
or good faith exception.
More you should know:
In recent years, some section 412(i) plans have been funded
with life insurance using face amounts in excess of the maximum death benefit a
qualified plan is permitted to pay.
Ideally, the plan should limit the proceeds that can be paid as a death
benefit in the event of a participant’s death.
Excess amounts would revert to the plan.
Effective February 13, 2004, the purchase of excessive life insurance in
any plan is considered a listed transaction if the face amount of the insurance
exceeds the amount that can be issued by $100,000 or more and the employer has
deducted the premiums for the insurance.
A 412(i) plan in and of itself is not a listed transaction;
however, the IRS has a task force auditing 412i plans.
An employer has not engaged in a listed transaction simply because
it is a 412(i) plan.
Just because a 412(i) plan was audited and sanctioned for
certain items, does not necessarily mean the plan engaged in a listed
transaction. Some 412(i) plans have been audited and sanctioned for issues not
related to listed transactions.
Companies should carefully evaluate proposed investments in
plans such as the 419 Plan. The claimed deductions will not be available, and
penalties will be assessed for lack of disclosure if the investment is similar
to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS
fines participants a large amount of money for not properly disclosing their
participation in listed, reportable or similar transactions; an issue that was
not before the Tax Court in either Curcio or McGehee. The disclosure needs to
be made for every year the participant is in a plan. The forms need to be
properly filed even for years that no contributions are made. I have received
numerous calls from participants who did disclose and still got fined because
the forms were not filled in properly. A plan administrator told me that he
assisted hundreds of his participants file forms, and they still all received
very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many
412i retirement plans, captive insurance plans with life insurance in them and
Section 79 plans.
Captive Insurance Plans, Want to Get Audited? - HG.org
Captive Insurance Plans, Want to Get Audited? - HG.org
The insurance industry have been conjuring ways to make life insurance premiums tax deductible. Over the years we have seen many schemes that have failed IRS scrutiny. Welfare benefit plans set up under I.R.C. section 419, 412(e) plans and Producer Owned Reinsurance Companies (PORCs) are all common examples.
When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.
Captive Insurance- Buyer Beware!
Parts of this article are from the book by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
September 24, 2010
Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.
—Eddie Shaw
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions range from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90 percent of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.
These so-called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.
Captives can be a great cost-saving tool, but they can also be expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection or tax deferral vehicles, or other benefits not related to the true business purpose of an insurance company, face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under Section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments within small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. Some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxlibrary.us.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
How to Find the Right Experts to Guide You Through These Times
How to Find the Right Experts to Guide You Through These Times
How much money have you lost in the market today? Is your insurance company still in business? Will it be in business tomorrow? Are you still working with your insurance agent financial planner, stock broker etc. who put you into this situation? Are you going to do anything about your situation? If you are like most people you will sell stuff and lose money, or do nothing while you lose more, your bank and insurancecompany goes out of business and your retirement plan savings disappears. It does not have to be this way. None of my clients have lost money. My retirement plans went up in value every month in 08. Why did you not have the same results.? Who do you listen to for advice? Your broker, insurance agent financial planner, or your friends? They have all lost money. Things are going to get worse. You can do something to get your money back, or like most people keep losing. Don't believe me put Lance Wallach into Google or any search engine to see what I do. Then compare it to whoever advises you. Who would you listen to now?
How much money have you lost in the market today? Is your insurance company still in business? Will it be in business tomorrow? Are you still working with your insurance agent financial planner, stock broker etc. who put you into this situation? Are you going to do anything about your situation? If you are like most people you will sell stuff and lose money, or do nothing while you lose more, your bank and insurancecompany goes out of business and your retirement plan savings disappears. It does not have to be this way. None of my clients have lost money. My retirement plans went up in value every month in 08. Why did you not have the same results.? Who do you listen to for advice? Your broker, insurance agent financial planner, or your friends? They have all lost money. Things are going to get worse. You can do something to get your money back, or like most people keep losing. Don't believe me put Lance Wallach into Google or any search engine to see what I do. Then compare it to whoever advises you. Who would you listen to now?
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