Tax Court Again Takes Dim View of Benistar Plan

In McGehee Family Clinic the Tax Court ruled that a clinic and shareholder's investment in an employee benefit plan marketed under the name was a listed transaction substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan. Notice 95-34 was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC [section] 419 limits. In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(f)(6) provides an exemption from section 419 and section 419A for certain 10-or-more welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10% of the total contributions, and the plan must not be experience-rated with respect to individual employers (that is, one that allows contributions to increase or decrease based on benefits or overall experience). As discussed in Notice 95-34, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer's contributions or its employees' benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in Notice 95-34. The benefits of enrollment listed in its advertising packet included, as described in an earlier case involving the same plan, Curcio v Commissioner (TC Memo 2010-115): * Virtually unlimited deductions for the employer; * Contributions could vary from year to year; * Benefits could be provided to one or more key executives on a selective basis; * No need to provide benefits to rank-and-file employees; * Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans; * Funds inside the plan would accumulate tax-free; * Beneficiaries could receive death proceeds free of both income tax and estate tax; * The program could be arranged for tax-free distribution at a later date; * Funds in the plan were secure from the hands of creditors. …