Fox & Fox Recent IRS Releases to IRC 412(e)

Recently the IRS issued guidance on the use of Cash Value Life Insurance in Single Employer IRC §419 plans. The guidance came in the form of:

This section of our website will be updated weekly with ongoing analysis of ISP program vis-a-vis the recent IRS guidance.

Cronin Insurance Services, the sponsor of the ISP program, along with Fox & Fox will shortly be contacting all employers with options regarding the continuance of their Single Employer Welfare Benefit Plan. Please check this site periodically for update.

If you have specific questions concerning your plan or your client's plan, we can be contacted @ 419info@foxnfox.com.

ISP Plan Specific Details

In light of the Service's recent negative guidance for certain welfare benefit plans involving cash value life insurance policies it seems prudent to review and completely understand the plan structure of the ISP.

The Insured Security Plan provides a pre retirement term death benefit to participants. The trust does not own cash value life insurance. The trust does not accumulate any cash value reserves. This has been confirmed in no change audits and by reviewing the Form 5500 and the SPD (Summary Plan Description).

What exactly does the trust own and how is the pre retirement term death benefit provided then?

The property the trust owns is a very limited collateral assignment which gives the trustee a security interest in the proceeds of a life insurance policy. The trust makes an annual expenditure to acquire the collateral assignment. The trust has no ownership interest in any life insurance policy. It has no rights to any cash value of a life insurance policy, nor does it technically pay a life insurance premium (a more detailed legal description of the ISP structure is attached). Unlike the facts of Situation 1 in Revenue Ruling 2007-65, if the employer owned the collateral assignment and transferred it to the employer, it would get a deduction.

The actuarial cost of the collateral assignment (which is similar to a term death benefit) is calculated by taking the current year's term cost, (using rates lower than 1980 CSO mortality) times the appropriate death benefit amount, plus administrative expenses. The actuarial method to compute the "normal cost" of this benefit is taken from the approved approach in the Wells Fargo case. From now on, every completed case will receive an actuarial certification confirming the deductible contribution taken by the employer as being the correct qualified direct cost.

This is especially important because Code Sec. 419(e) provides that the deduction limitations applicable to contributions to funded welfare benefit plans under Code Sec. 419 and 419A do not apply to a welfare benefit fund whose contribution is actuarially certified.

The issues of dividend income to an owner/employee, a plan deferring the receipt of compensation, a plan of non qualified deferred compensation for purposes of Sec. 409A, an arrangement coming within the definition of a split dollar life insurance arrangement under Sec. 1.61-22, and any issues under Sec. 264(a), have all been previously dealt with in the income tax opinion letter and the analysis remains unchanged and favorable.