What Is a 79/10 Plan and Why Is It a Listed Transaction?
Examines the structure of 79/10 plans, an executive benefit where the tax treatment of life insurance led to its designation as a listed transaction by the IRS.
A 79/10 plan is a supplemental benefit strategy for key employees that involves life insurance. Promoters suggest these arrangements provide tax deductions for the business while offering tax-advantaged benefits to selected employees, who are often business owners. The name references sections of the Internal Revenue Code (IRC) that proponents claim validate the tax outcomes. These plans have drawn significant attention from the Internal Revenue Service (IRS) due to their interpretation of tax law, resulting in specific classifications and reporting duties.
Plan Structure and Mechanics
A 79/10 plan operates through an employer, a key employee, and an insurance company. The employer pays premiums on a permanent life insurance policy, such as a universal or whole life policy, which is owned by the employee. These arrangements are structured to appear as part of a group-term life insurance plan to gain favorable treatment under IRC Section 79.
The core of the plan involves allocating the employer’s premium payments to two distinct components within the policy. A portion of the premium pays for the pure insurance protection, which is the death benefit. The remainder, often the larger part, is used to build the policy’s cash surrender value, which accumulates for the employee’s personal benefit.
This separation of costs associated with the death benefit from contributions that fund the cash value is central to the tax results the plan aims to achieve for both the employer and the employee. The goal is to provide a substantial benefit to the employee beyond what a typical group-term life insurance policy would offer.
Tax Implications for Employers and Employees
For the employer, the intended tax treatment is a deduction for the premiums paid into the plan. Promoters argue that the portion of the premium attributable to the term life insurance coverage is a deductible business expense. The tax treatment of the portion of the premium that funds the cash value is a primary point of contention with the IRS.
For the employee, the main tax consequence is the recognition of imputed income for the economic benefit received. The employee must report as taxable income the value of the life insurance coverage provided by the employer. This taxable income is determined by the lower of either the rates found in the IRS’s Table I or the insurance carrier’s own one-year term insurance cost for the amount of coverage.
Any growth in the policy’s cash value is tax-deferred, meaning the employee does not pay taxes on the gains as they accrue. Upon the employee’s death, the policy’s death benefit is received by the designated beneficiaries free of federal income tax.
IRS Scrutiny and Compliance Considerations
Certain versions of these benefit arrangements have faced intense scrutiny from the IRS, which views them as having a high potential for tax avoidance. In response, the agency issued Notice 2007-83, which designated specific arrangements using cash value life insurance policies as “listed transactions.”
A listed transaction is a reportable transaction that the IRS has identified as a tax avoidance scheme. This designation imposes disclosure obligations on both the taxpayers who participate and their advisors. Participants are required to file Form 8886, Reportable Transaction Disclosure Statement, with the IRS.
However, in the 2022 case Mann Construction, Inc. v. United States, a U.S. Court of Appeals invalidated Notice 2007-83. The court ruled the notice was issued without the required notice-and-comment procedures under the Administrative Procedure Act. While the IRS cannot enforce the reporting requirements or penalties from that notice, it can still challenge the claimed tax benefits of these arrangements based on underlying tax code principles and has indicated it will continue to scrutinize them.