What Is a 79/15 Plan and Why Is It a Listed Transaction?

A 79/15 plan is a tax strategy, often presented to business owners, that combines life insurance with an employee bonus structure. These arrangements have attracted considerable attention from the Internal Revenue Service (IRS) due to their aggressive interpretation of tax law. Promoters of these plans suggest they offer tax deductions for the business while providing tax-favored benefits to key employees, who are frequently the owners themselves. The structure is named in reference to two sections of the Internal Revenue Code (IRC) that promoters claim justify the tax treatment.

The core of the issue revolves around how contributions to the plan are deducted and how benefits are received. The IRS has scrutinized these arrangements, concluding that the claimed tax benefits are often not allowable. This has led to specific classifications and reporting requirements for taxpayers who have participated in them.

The Mechanics of a 79/15 Plan

The structure of a 79/15 plan is built upon two distinct components of the Internal Revenue Code, which promoters use to justify the arrangement’s purported tax benefits. The first part of the strategy involves Section 79, which pertains to group-term life insurance purchased for employees. In this context, the plan uses permanent life insurance, such as a cash-value policy, rather than simple term insurance. The business pays the premiums on these policies and, according to promoters, can deduct the portion of the premium that relates to the pure life insurance protection, often referred to as the “term cost.”

The portion of the premium that exceeds this term cost is not for insurance protection but instead contributes to building the policy’s cash surrender value. This cash value component is a form of savings or investment that grows within the policy, and its funding is addressed by the second part of the plan’s structure.

The second component of the plan utilizes a bonus plan under the authority of Section 162, which allows businesses to deduct ordinary and necessary business expenses, including employee compensation. In a 79/15 arrangement, the employer pays a bonus to the covered employee, who is typically a business owner or executive. This bonus is intended to be large enough for the employee to pay the portion of the life insurance premium that builds the policy’s cash value.

The employee, after paying their portion of the premium with the bonus funds, benefits from the tax-deferred growth of the cash value inside the life insurance policy. Promoters often suggest that when the plan is terminated, the policy can be distributed to the employee with minimal tax consequences.

IRS Scrutiny and Classification

The Internal Revenue Service views 79/15 plans and similar arrangements with skepticism, identifying them as potential tax avoidance schemes. The agency’s primary concern is that these plans generate improper deductions for the employer and mischaracterize the tax treatment of the benefits for the employee. The IRS contends that the deductions claimed by the business are often disproportionate to the actual benefits provided and that the overall structure is designed to deliver tax-favored cash to owners rather than to provide legitimate employee welfare benefits.

In response to the proliferation of these and comparable strategies, the IRS issued Notice 2007-83. This guidance officially designated certain trust arrangements that use cash value life insurance policies to fund employee welfare benefits as “listed transactions.” A listed transaction is a specific category of reportable transaction that the IRS has determined to have a high potential for tax avoidance or evasion.

The agency argues that when a welfare benefit fund is directly or indirectly a beneficiary under a life insurance policy, the premiums are not deductible. It also challenges the idea that employers can deduct contributions used to fund the cash value of policies that are ultimately distributed to business owners for their personal benefit. The IRS asserts that these arrangements often discriminate in favor of highly compensated owners, which violates the principles of legitimate welfare benefit plans. The classification as a listed transaction means participants are subject to stringent disclosure requirements.

Required Information for Disclosure

When a taxpayer has participated in a listed transaction, they are required to disclose this participation to the IRS. This is accomplished by filing Form 8886, Reportable Transaction Disclosure Statement.

The disclosure must include the following information:

• The name and number of the listed transaction. For arrangements covered by Notice 2007-83, the taxpayer would identify the transaction based on the details in that specific notice.
• A detailed factual description of the transaction, outlining each step of the arrangement and their specific role in it.
• The identification of all “material advisors.” This includes any individual or firm that provided assistance or advice regarding the transaction, such as the promoters who sold the plan, as well as any accountants or attorneys involved.
• The expected tax benefits, detailing the amount of deductions or other tax advantages claimed for all tax years of participation.

Filing the Reportable Transaction Disclosure Statement

Once Form 8886 has been fully completed with all the necessary information, the taxpayer must follow a specific dual-filing procedure. Failure to adhere to these steps can result in the disclosure being deemed incomplete, which can lead to penalties.

The first step is to attach a copy of the completed Form 8886 to the federal income tax return for each year the taxpayer participated in the transaction. For example, if the plan was active during the 2022 and 2023 tax years, a separate Form 8886 must be attached to the tax return for each of those years. If the transaction resulted in a loss that is carried back to a prior year, the form must also be attached to the amended return or application for a refund for that carryback year.

Simultaneously, the taxpayer must mail a separate, identical copy of the initial Form 8886 to the IRS Office of Tax Shelter Analysis (OTSA). The current mailing address for this office is: Internal Revenue Service, OTSA Mail Stop 4915, 1973 Rulon White Blvd., Ogden, UT 84201.

The penalties for failing to properly file Form 8886 are substantial. Under IRC Section 6707A, penalties can be as high as $100,000 for individuals and $200,000 for other entities for each failure to disclose a listed transaction.