What is a Section 79 Plan?

What is a Section 79 Plan?



So what is a Section 79 plan? It is a tax plan where small-business owners are told that they’re allowed to take a tax deduction through their businesses in order to purchase life insurance. That sounds pretty good, doesn’t it? When you break down the math and the sales pitch, however, it just doesn’t make sense.
Agents try to sell Section 79 plans for two simple reasons: 
  1. Many small business clients will buy any plan that is "deductible" because they hate paying income taxes.
  2. Insurance advisors want to sell life insurance.
This brings up an interesting issue: If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons: 
  1. Most advisors have not broken down the math so they can come to a correct conclusion, which is that the plans are not worth implementing from a pure financial standpoint.
  2. Some advisors know the plan is marginal from a financial standpoint and don't care because they know they can still sell it to business owners who are looking for deductions. The IRS considers them abusive, and will audit them.
How to avoid the fines

In order to avoid substantial IRS fines, business owners and material advisors involved in the sale of any of the above type plans must properly file under Section 6707A. Yet filing often isn’t enough; many times, the IRS assesses fines on clients whose accountants did file the form yet made a mistake – an error that usually results in the client being fined more quickly than if the form were not filed at all. 

Everyone in a Section 79 should file protectively under Section 6707A – and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on, and has extensive experience filing protectively. The IRS still has task forces auditing these plans, and will soon move on to Section 79 scams, including many of the illegal captives pushed by the insurance companies and agents (though not all captives are illegal).

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