79/19 Plans: An IRS Listed Transaction

A 79/19 plan is a wealth accumulation and tax strategy marketed to business owners that uses life insurance to generate purported tax benefits. The name refers to Internal Revenue Code (IRC) Section 79, which governs group-term life insurance, and a separate, permanent life insurance policy. Promoters highlight the potential for significant tax deductions for the business while providing a tax-advantaged savings vehicle for the owner. The strategy is presented as a way for a business to fund a personal, high-cash-value life insurance policy for an owner by linking the two policies.

Understanding the 79/19 Plan Structure

A 79/19 plan is a strategy that combines two different types of life insurance policies to leverage specific sections of the tax code. The first component is a group-term life insurance policy, and the second is a permanent life insurance policy with a cash accumulation feature.

The foundation of the arrangement is a group-term life insurance policy established by the business. This policy is governed by IRC Section 79 and provides a death benefit to the beneficiaries of covered employees. Under its rules, an employer can generally deduct the premiums it pays for this coverage as a business expense. This component gives the plan its name and its purported tax-deductible funding mechanism.

The second component is a permanent life insurance policy, such as a whole life or universal life policy. This policy is designed to build cash value over time and is owned personally by the employee, not the business. The cash value within the policy grows on a tax-deferred basis, meaning the owner does not pay taxes on the internal gains as they accrue.

The two policies are linked through the plan’s funding mechanism. The business pays the premium for the group-term policy and often provides a bonus to the employee. The employee then uses this bonus money to pay the premiums on their personally owned permanent life insurance policy.

Tax Consequences of the Arrangement

The tax implications of a 79/19 plan differ for the business and the employee, often contradicting the claims of promoters. For the business, the main attraction is the claimed tax deduction for the group-term life insurance premiums. Under IRC Section 79, these premiums are a deductible business expense, provided the plan does not discriminate in favor of highly compensated employees. The IRS may challenge these deductions, arguing the arrangement is designed to primarily benefit the owner-employee, thus violating non-discrimination rules.

If the IRS determines a plan is discriminatory, the tax deduction for the premiums can be disallowed. The agency’s view is that the term insurance component is a conduit to channel funds to the permanent policy. This means the premium payments are not a legitimate insurance expense but a disguised distribution of profits or a personal expense of the owner.

For the employee, an important tax rule involves the group-term coverage. An employee can receive up to $50,000 of group-term life insurance coverage tax-free, but the value of any coverage exceeding this amount must be included in their taxable income. This “imputed income” is calculated based on a specific table provided by the IRS and is subject to Social Security and Medicare taxes.

Another consequence for the employee is the treatment of funds for the permanent policy. Any bonus paid by the business for this purpose is fully taxable as ordinary income to the employee. This directly refutes any claims that the permanent policy is being funded with “tax-free” dollars. While the policy’s cash value grows tax-deferred, the premiums are paid with the employee’s post-tax money.

IRS Scrutiny and Contested Legal Status

The Internal Revenue Service views 79/19 plans as potentially abusive tax shelters. The agency’s position is that these plans improperly claim tax deductions for personal expenses by attempting to convert non-deductible personal life insurance premiums into deductible business expenses.

In 2007, the IRS issued Notice 2007-83, which classified certain abusive life insurance arrangements as “listed transactions”—a designation for aggressive tax avoidance schemes. However, the notice’s legal authority has been successfully challenged. In the 2022 case Mann Construction, Inc. v. United States, a federal court of appeals invalidated the notice, ruling that the IRS had failed to follow required public notice-and-comment procedures. Other courts have since agreed with this reasoning.

While these court rulings have undermined the IRS’s approach, the agency has not abandoned its position and may still challenge these arrangements. In response, the IRS has begun the process of re-identifying certain arrangements as listed transactions through formal rulemaking. Taxpayers involved in such plans face a significant risk that their claimed tax deductions will be disallowed in an audit, leading to back taxes, interest, and potential penalties.

Disclosure and Reporting Obligations

A “listed transaction” designation normally carries mandatory disclosure requirements for taxpayers, who must file Form 8886, Reportable Transaction Disclosure Statement. However, because federal courts have invalidated Notice 2007-83, the legal foundation for this mandatory reporting requirement has been successfully challenged.

The obligation to file Form 8886 for these specific plans is now a legally contested issue. The IRS may still assert that disclosure is required, particularly in jurisdictions not covered by the court rulings, creating a complex and uncertain situation for taxpayers. It is also noteworthy that “material advisors”—the individuals or firms who promote or provide advice on these plans—have their own separate reporting requirements to the IRS.