William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan

Posted by William Byrnes on February 18, 2011

A recent Tax Court case demonstrates the severe tax consequences for an employee when a welfare-benefit plan ceases to qualify under section 419A of the Tax Code.  Section 419A governs “qualified asset accounts,” which are employer provided welfare-benefits plans that set aside funds for (1) disability benefits, (2) medical benefits, (3) severance benefits, or (4) life insurance benefits. In general, contributions by an employer to a welfare-benefit plan are tax deductible by the employer if they are ordinary and necessary business expenses. In the case, part of the funds contributed to the plan were used to buy life insurance coverage for the principal and other employees, with the rest of the funds constituting excess contributions. 

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