Planning with welfare benefit plans after the Prime Financial decisions: a case for caution for Sec. 419A(f) (6).

• Author: Cohen, Paul Joseph
• Position: IRC s. 419A(f - 6

Many attorneys, accountants and insurance professionals focusing on trust and estate work, business and personal financial planning or wealth protection and transfer, have heard, read or attended seminars to learn about the unique planning opportunities available through the use of a Ten Or More Multiple Employer Welfare Benefit Plan (TOMME). These plans are often referred to as voluntary employee benefit associations (VEBAs) or Sec. 419 plans.

The benefits to be derived from a TOMME are available through the adoption of the plan by any business entity (whether a proprietorship, partnership, limited liability company or corporation). Principals are eligible participants and coverage requirements are extremely liberal; participation by employees is voluntary. Eligibility requirements are similar to qualified retirement plans (i.e., age 21 and three years of service), with no vesting for employees who terminate.

The benefit most frequently provided to participants is a death benefit, usually based on a multiple of compensation. The compensation used is limited to the Sec. 505(b)(7) limits when the plan is a VEBA, but non-VEBA TOMMEs (plans operating with taxable trusts) are not required to limit compensation or to comply with ERISA's nondiscrimination rules unless their purpose is to provide a benefit to participants beyond retirement.

For advisers intending to satisfy an estate liquidity need or a business succession plan, or to protect personal asset accumulations for the next generation, the focus should be on a TOMME that complies with the requirements of Secs. 505 and 414. That way, postretirement benefits are available and the penalties of Sec. 4976 (100% excise tax on benefits) can be avoided.

The use of these programs should be approached with extreme caution. There are a number of sponsor-promoters who market their plans, demonstrating large tax-deferred accumulations of assets which they claim can be accessed by principals who terminate their participation in the plan and take a taxable distribution. However, these plans are not allowed to provide deferred compensation; although termination is allowable for any number of business reasons, the accumulation rationale is a contradiction that the IRS has challenged (and will continue to challenge) as deferred compensation. Such challenges are especially likely when the promoters have demonstrated termination scenarios that reflect 80% to 98% of the accumulations being distributed to the...