The IRS recently warned
taxpayers about participating in certain trust arrangements that are being sold
to professional corporations and other small businesses as welfare benefit
funds. Although many legitimate welfare benefit funds that provide benefits to
employees and retirees (such as health and life insurance) exist, employers should
be cautious of arrangements that primarily benefit a business’s owners or other
main employees, often as distributions of cash, loans, or life insurance
policies, said the IRS. The tax benefits realized from these arrangements
cannot be claimed.
The warning was intended
to address and deter specific abuse involving a limited group of arrangements purported
to be welfare benefit funds. An illegitimate scheme, depending on the
circumstances, may come in the form of an arrangement that provides dividends to
a company’s owners that are included in the owners’ income but aren’t
deductible by the business, or a non-qualified deferred compensation plan.
Also, some arrangements offering welfare benefits may even have tax
consequences different than what is claimed.
The IRS identified
certain trust arrangements involving cash value life insurance policies and
substantially similar arrangements as “listed transactions.” Taxpayers who
would otherwise have to file a disclosure statement before Jan. 15, 2008, now
have until that date to make the necessary disclosures.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Practical Suggestions
Small business owners
should be aware of the IRS warning and be alert to welfare benefit funds that:
• appear to provide the
most benefit to business owners or other key employees
• offer cash
distributions, loans, or life insurance policies disproportionately to business
owners or key employees
Remember that if
something appears too good to be true, it usually is. If you have any questions
about your current welfare benefit fund, or if you are considering adopting a
new one, be sure to clear all plans with your tax advisor.