Captive Insurance & 419 Plans Litigation: September 2013

Captive Insurance & 419 Plans Litigation: September 2013

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.

Non-discrimination

Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners.

As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement.

It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy.

Notwithstanding the math behind Section 79 plans, let's talk about the benefits for employees. The employee owner is going to buy a "permanent" policy that will carry cash and can be borrowed from tax free in retirement.

That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees.

How do you "work around" this issue?

The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent).