How quickly we forget the tax avoidance plans that went down in flames when the IRS turned its scrutinous eye on it. One of the biggest ones in our industry’s history is the 419 welfare benefit plan.
419 plans (more properly known as 419A(f)6 multiple employer plans or more recently known as 419(e)3 single employer plans) were the industry darlings back in
the late 1990s and early 2000s. They were “employee benefit plans” that allowed business owners to take tax deductions through their company to buy life
insurance inside the 419 plan.
The policies were allowed to grow tax free and, ultimately, when the owners hit retirement, they would terminate their involvement in the plan; and the
policies would be distributed to the owners who would then own them individually and borrow from them tax free in retirement.
419 plans were sold as the tax-deductible purchase of life insurance and became the favorite of many insurance agents looking to sell $100,000+ annual premium cases.
Of course, when a large segment of an industry starts incorrectly marketing a plan as the tax-deductible purchase of life insurance, the IRS starts taking a close look; and that’s certainly what happened with 419 plans.
The IRS went after them with a vengeance and got Congress to act to curb what the IRS saw as abuses. It didn’t matter much if you put a plan in place that was “done right.” There were so many non-compliant/bogus plans out there that the IRS/Congress basically killed all of them.
One prominent promoter/TPA of 419 plans was Tracy Sunderlage out of the Chicago area.
Final Judgment and Permanent Injunction—the Tax Division of the U.S. Department of Justice was after Mr. Sunderlage and his companies.
On February 28, 2012, John Darrah, U.S. District Judge, signed a final order and permanent injunction with the agreement and approval of Mr. Sunderlage. The injunction is what’s really interesting. It bars Mr. Sunderlage from promoting, selling, acting as trustee or administrator for, or otherwise organizing, administering, or implementing:
-the PBT Multiple Employer 419 Plan and/or the Maven Structure described in the complaint.
-any plan or arrangement that is similar to the PBT Multiple Employer 419 Plan and/or the Maven Structure, including any plan or arrangement that claims to be a welfare benefit plan or to allow an employer to make a deductible contribution to a welfare benefit fund under I.R.C. Section 419 and/or I.R.C Section 419A.
-any plan that assists others to violate or attempt to violate the internal revenue laws or unlawfully evading the assessment or collection of one’s federal tax liabilities.
The above are just three of the restrictions that Mr. Sunderlage agreed to. There are three more; but for the sake of brevity, I’ve listed the above which should get my point across.