Dictionary of Exit Planning Terms

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419(e) Plan

A 419(e) plan can be created by an employer to fund welfare benefits that cover sickness, accidents, disability, death or unemployment.  Benefits can be both before and after retirement.  If structured properly, contributions to these plans may be tax deductible.

These plans are set up under IRS code section 419 which allows for employers to take deductions, with certain limits, for contributions that are made into a fund for the benefit of employees.  Life insurance can be included, but the employer cannot be the beneficiary.  To qualify, the plan must be funded and offer benefits to all employees.  This is usually accomplished through a trust.

There are complex rules and deductions must be actuarially certified. Use of the qualified 3rd party expert with these plans in recommended.

Unfortunately tax abuses by some companies with 419(f)(6) programs has increased IRS scrutiny of all 419 plans. The consequence of failing the IRS tests is that the deductions may be disallowed.  Also with life insurance, there may be requirements to make annual payments into the plan.  If the company does not make necessary payments, then the employees will lose their benefits.