Did you Participate in a 419 or 412i Benefit Plan?
Lance Wallach is the nation's foremost expert on 419 plans, 412i plans, listed transactions, reportable transactions, Section 79 plans, captive Insurance plans
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the establishment and funding of some of these plans. As a practical matter, most of the targeted practices are found in smaller plans (1 to 15 participants). If the IRS is successful in attacking these practices, taxpayers that established these types of 412(i) plans in the last few years will face substantial taxes and penalties unless they properly present their positions in the audit process.
Over the past several years, the IRS has systematically escalated its challenge to “abusive” 412(i) plans. The chronology:
Beginning in the early 2000s, IRS officials began giving speeches at benefits conferences expressing the Service’s concern that 412(i) plans were being funded in a way that did not meet the letter or the spirit of the Internal Revenue Code. The officials commented that the IRS intended to take steps to prevent misuse of insurance products in qualified plans. The plans which seemed to generate the most IRS attention were those funded exclusively or almost exclusively with life insurance (as opposed to annuities or a mix of life insurance and annuities). This was especially true of plans using policies designed to have low initial cash surrender values and high premium costs for a fixed number of years. The IRS was also concerned about the sale or distribution of these policies from the plans to key employees, where artificially suppressed values were used. In February 2004, the IRS issued 412(i) guidance. The guidance covers: plans that discriminate in favor of the high paid through the types of insurance contracts held by the plan for their benefit; deductibility of premium contributions; and life insurance contract valuation issues. This guidance also placed certain plans on the IRS list of abusive tax transactions -– that is, plans funded with life insurance with a policy death benefit exceeding the permissible legal limits by $100,000 or more. Taxpayers who engage in “listed transactions” are required to report them to the IRS or face substantial penalties ($100,000 in the case of individuals and $200,000 in the case of entities). In addition, “material advisors” to these plans are required to maintain certain records and turn them over to the IRS on demand. Then, in October 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would ha
IRS Targets 412(i) Plans
ReplyDeleteThe ERISA Audit Bulletin
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the establishment and funding of some of these plans. As a practical matter, most of the targeted practices are found in smaller plans (1 to 15 participants). If the IRS is successful in attacking these practices, taxpayers that established these types of 412(i) plans in the last few years will face substantial taxes and penalties unless they properly present their positions in the audit process.
Over the past several years, the IRS has systematically escalated its challenge to “abusive” 412(i) plans. The chronology:
Beginning in the early 2000s, IRS officials began giving speeches at benefits conferences expressing the Service’s concern that 412(i) plans were being funded in a way that did not meet the letter or the spirit of the Internal Revenue Code. The officials commented that the IRS intended to take steps to prevent misuse of insurance products in qualified plans. The plans which seemed to generate the most IRS attention were those funded exclusively or almost exclusively with life insurance (as opposed to annuities or a mix of life insurance and annuities). This was especially true of plans using policies designed to have low initial cash surrender values and high premium costs for a fixed number of years. The IRS was also concerned about the sale or distribution of these policies from the plans to key employees, where artificially suppressed values were used.
In February 2004, the IRS issued 412(i) guidance. The guidance covers: plans that discriminate in favor of the high paid through the types of insurance contracts held by the plan for their benefit; deductibility of premium contributions; and life insurance contract valuation issues. This guidance also placed certain plans on the IRS list of abusive tax transactions -– that is, plans funded with life insurance with a policy death benefit exceeding the permissible legal limits by $100,000 or more. Taxpayers who engage in “listed transactions” are required to report them to the IRS or face substantial penalties ($100,000 in the case of individuals and $200,000 in the case of entities). In addition, “material advisors” to these plans are required to maintain certain records and turn them over to the IRS on demand.
Then, in October 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would ha