The Word is Out: IRS Secrets You Should Know

by Lance Wallach

Substantial tax reduction, estate planning and asset protection. VEBAs, anyone? Do you pay too much income tax? Are you interested in protecting your assets from creditors? Would you like incredibly large tax deductions every year? How about providing financial security for your family while minimizing taxes? Sound interesting? If so, you should consider utilizing a VEBA, a Voluntary Employees Beneficiary Association. All contributions are tax deductible and money can come out tax free for certain benefits.

Profitable businesses looking to substantially reduce their tax liabilities and protect their assets from creditors can also utilize a VEBA.

Business Opportunities

Although they have been in existence since 1928, VEBAs are not well known or understood. They allow an employer to receive a current tax deduction while putting away funds that are not currently needed. They also give the employer a great deal of latitude in choosing plan benefits.

VEBA assets are protected from the claims of creditors. The amounts in which contributions are made can be flexible, and benefits are highly favorable to the business owner. Additionally, a VEBA can allow you to deduct life, health, disability and long-term care insurance and also solve retained earnings problems. An employer can maintain both a retirement plan and a VEBA simultaneously.

A VEBA allows larger tax-deductible contributions than a 401(k) plan because it is not subject to the same strict pension plan guidelines. There are, however, numerous other plans being sold that look like VEBAs but may get you into IRS trouble, so be careful.

412(i) Fully Insured Defined Benefit Plans

412(i) plans continue to generate both interest and caution following recent Internal Revenue Service and Treasury Department actions to crack down on a number of abusive schemes that had cropped up in this marketplace.

Many accountants prefer S corporations for their clients. This allows the client to have large amounts of income without worrying about excess profits, accumulating retained earnings, dividends or double taxation of profits. However, since W-2 wages are subject to payroll taxes and passive dividend income is not, many S corporation owners limit their W-2 wages to modest amounts and pass through the majority of the client's income free of payroll tax. While this may make tax-planning sense, it may dramatically curtail the amount of permissible retirement plan contributions, which may only take W-2 wages into account.

But a 412(i) plan contribution may far exceed 100 percent of compensation. We have seen cases where tax deductible contributions in excess of $200,000 annually for a single participant were allowed. For example, a W-2 wage of $50,000 would permit a maximum SEP-IRA contribution of $12,500 for a 50-year-old, but will allow a 412(i) contribution of over $75,000. Care must be exercised, though, to assure that a 412(i) plan is properly designed and funded.

While a completely tax free environment may not be legally possible, most of us can come a lot closer to it. The choice is simple: pay yourself or pay the IRS*.

Lance Wallach speaks and writes extensively about Voluntary Employees Beneficiary Associations, retirement plans and tax reduction strategies. He will be speaking at the Americas Glass Association Glass Expo'06 in Anaheim on May 12-13, 2006.

* The information provided in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.