419A(f)(6) Plans

 419A(f)(6) Plans allow employees to participate in multiple (ten or more) employer plans that provide life insurance and severance benefits for qualified employees.

This plan allows employees to provide permanent life insurance plans and severance benefits and write off the premium cost. 

In addition, employees with multiple corporate or business entities may enroll the plan in the entity that is most favorable to their interest.  The plan is easy and inexpensive to administer, and allows the participant to exit the program without difficulty or expense. 

Company owners who wish to provide life insurance for themselves and a minimum number of employees and write off the premium are prospects. 

Plan Advantages 

• Substantial deductions available
• Contributions not included in taxable income of participant until received
• Tax deductible life insurance premiums
• Flexible funding options
• Contributions invested in tax deferred products
• No early withdrawal penalties
• Minimum employee costs
• Creditor proof asset structure available
• Estate tax free death benefits with proper planning
• Low plan administration costs
• Controlling shareholders eligible
• Permits employer withdrawal and asset distribution with notice

The History of Welfare Benefit Trusts

 In 1984, Congress enacted Code section 419A(f)(6) to allow the deductible funding of employee benefits in a multiple employer plan.  Unfortunately, the Internal Revenue Service failed to write regulations for the code section.  Lawyers, accountants, and their clients wanting to make use of the tax advantages of the statute have had to rely upon relevant case law, related code sections, and their best judgment to determine what would constitute a valid multiple employer welfare benefit plan. 

The statute itself says very little.  It says that a plan with ten or more employers, with no one employer normally contributing more than 10% of the total, and with no experience rating to individual employers, would be exempt from the funding restrictions of Code section 419A.  Welfare benefit plans are not retirement benefits or deferred compensation programs, and there can be no reversion to the employer.  There must be substantial risk of forfeiture to avoid including the benefits in the taxable incomes of the employees.  The cost of the benefits must be actuarially determined to be reasonable, and represent the current liability with no pre-funding of future benefits. 

In June of 1997, the U.S. Tax Court ruled on the Prime Trust 419 plan in the case known as Booth v. Commissioner.  The IRS argued that the plan was a disguised plan of deferred compensation; that the plan was experience related to individual employers; that the plan was an aggregation of separate plans, and that the taxpayers were subject to under withholding penalties in addition to the tax and interest.  The court did not agree. 

The National Benefit plans meet the specifications required by the Booth decision.  Assets are pooled, not segregated by employer.  The Trust Reports are not employer specific.  The legal opinion has been updated by Bryan Cave L.L.P. to include the recent Booth decision and IRS Notice 95-34.  This substantial Authority opinion is available on request.

The National Variable Benefit Plan

And The National Benefit Plan 

Both plans provide death and severance benefits to eligible employees.  Contributions are determined based upon the level of benefit elected by the employer, using a multiple of compensation to determine the actual benefit.  Contributions are deductible in the year made, but not included in the employee’s taxable income except the economic value of the life insurance coverage (PS58 costs). 

The employer makes his/her contribution payable to the plan’s Trustee, who will forward the money to the insurance carrier for deposit into tax deferred life insurance products.  The Trustee is the plan fiduciary and the owner of the plan’s assets.  The Plan Administrator prepares Annual Reports with the current employee Benefit Balances; files the Form 5500 for the Trust; delivers to the employer the 1099s reporting the taxable value of the insurance coverage; and prepares any amendments to the Adoption Agreement or Summary Plan Descriptions. 

Once the initial year contribution is made, the employer’s future funding obligation if limited to the increases in vesting and accrual of the stated benefit and the cost of the death benefit coverage.  Benefits costs will be determined based upon reasonable actuarial principles and will reflect the total trust result, with no consideration given to any specific employer group’s experience.

Severance Benefits 

Severance benefits are payable to covered employees at their termination of employment.  The benefit cannot exceed 2 times the compensation of the year prior to severing, and must be distributed within 24 months.  The employer selects the level of target benefit, along with the vesting schedule and accrual period.  The Plan Administrator will maintain each employee’s Benefit Balance reflecting the contributions made for the employee, the cost of the death benefit provided to the employee, and the employee’s share of the overall trust result, including gains, losses and forfeitures.  Severance benefits are not payable at the employee’s death, retirement, termination for cause or voluntary termination. 

Death Benefits 

The amount of death benefit multiple is not limited, except by usual industry guidelines.  The employee is entitled to name his/her beneficiary, who will be paid the specified amount of the policy directly by the carrier, death proceeds do not pass through the trust.  When properly structured the death benefit can be paid outside the insured’s taxable estate:  The death benefit proceeds will be received income tax free by the beneficiary.  Death benefits are provided through the purchase of term, universal life or variable life insurance policies and can be owned personally once the employer has withdrawn participation in the trust or after an employee has severed for any reason.

Single Pool 

The National Benefit Plan and the National Variable Benefit Plan both have a single pool accounting system.  This is not a risk to any one employer in the plan, primarily due to how the Plan Administrator determines what an employee is entitled to as a benefit from the plan.  White it is true that if the severance benefit was payable based upon a formula there would be a certain risk that the first employees out of the plan would have fully funded benefits paid, leaving inadequate assets for employees severing later.  Our solution is to have the benefits payable based upon the employee’s Benefit Balance, much like a defined contribution pension plan. 

An employer makes a contribution to the trust based upon the eligibility, vesting and accrual schedule and level of death and severance benefit desired.  The money is deposited to one or more universal or variable life contacts depending upon which trust the employee selects.  The allocation to each employee is based upon the employee’s income, years of service, age, sex and amount of death benefits.  Severance funding is also based upon the vesting and accrual schedules selected.  The amount an employee is eligible to receive at termination of employment is based upon the amounts contributed for him/her, the premiums paid for the death benefit coverage, and the pro rata share of the overall trust result.