What Is a 79/14 Plan and Why Is It a Listed Transaction?

A 79/14 plan is an employee benefit strategy that uses life insurance products. These arrangements are marketed to owners of closely held businesses as a way to provide benefits to key employees, who are often the owners themselves. The name is a marketing term; the “79” is a reference to IRC Section 79, while the “14” does not correspond to a section of the tax code. The plans combine different types of insurance to achieve specific financial outcomes.

The Internal Revenue Service (IRS) has scrutinized these arrangements, questioning the tax positions taken by their promoters. This has led to specific classifications and reporting requirements for taxpayers who have participated in them. Understanding the mechanics and regulatory status of these plans is important for any business owner considering such a strategy.

Plan Structure and Components

The architecture of a 79/14 plan combines two distinct life insurance components. The first element is based on IRC Section 79, which governs the tax treatment of group-term life insurance provided to employees. Promoters use this section as a justification for the employer to provide a life insurance benefit.

The second component involves a permanent life insurance policy, such as a whole life or universal life policy that builds cash value. This policy is structured under a collateral assignment split-dollar arrangement. In this setup, the employer and employee split the policy’s costs and benefits, and the employer’s interest is secured by a collateral assignment to recover its paid premiums.

These two pieces are bundled together. The employer makes payments into the arrangement, with promoters arguing that a portion of the payment covers the term insurance, while the remainder funds the cash value of the permanent policy. This structure uses a business expense to fund a personal investment vehicle for the employee.

Contribution and Funding Mechanics

The employer funds the plan by making annual premium payments on the life insurance policy held on the employee. Once the contribution is made, it is allocated between the two components of the plan. A portion of the premium is designated to cover the cost of the death benefit, which is the term insurance element.

The remaining, and much larger, portion of the contribution is used to fund the cash surrender value of the permanent life insurance policy. This allocation builds the investment-like savings element for the participating employee. Over time, these contributions cause the policy’s cash value to grow, creating a personal asset for the employee.

Tax Treatment for Participants

Promoters claim the business can take a tax deduction for the full premiums paid into the plan. The argument is that these payments are ordinary and necessary business expenses for employee benefits. This deduction includes the large contributions directed toward funding the policy’s cash value, not just the cost of the term insurance.

The participating employee must recognize some taxable income each year, but it is not based on the full premium. Instead, the employee’s taxable income is limited to the “economic benefit” of the life insurance coverage. This value is calculated using a government table, known as Table 2001, which assigns a low cost for term life insurance protection.

This creates a tax disparity where the employer deducts the large premium payment, while the employee reports a small amount of taxable income. The portion of the premium building the policy’s cash value is intended to grow in a tax-favored manner. The employee can eventually access this cash value, often through tax-free policy loans.

IRS Scrutiny and Reporting Requirements

The tax positions taken in 79/14 plans led to IRS scrutiny. The IRS issued Notice 2007-34, which designated certain arrangements using cash value life insurance as “listed transactions.” A listed transaction is a reportable transaction that the IRS has determined to have a high potential for tax avoidance or evasion.

This classification has major implications. The IRS asserts these plans improperly attempt to deduct contributions that fund the cash value of policies for the personal benefit of owners. By labeling them as listed transactions, the IRS presumes tax avoidance, shifting the burden of proof to the taxpayer and increasing the likelihood of an audit.

This designation imposes disclosure obligations on all participants. Both the employer and the employee in a 79/14 plan must file Form 8886, Reportable Transaction Disclosure Statement, with their tax returns for each year of participation. This form alerts the IRS that the taxpayer has engaged in a transaction the agency has identified as potentially abusive.

Failure to file this form can result in penalties. The penalty for not disclosing a listed transaction can be as high as $100,000 for an individual and $200,000 for other entities. An accuracy-related penalty of up to 30% can also apply to any tax understatement, and the failure to disclose extends the time the IRS has to assess tax owed.