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Material Advisor & 419 Plans Litigation: 412i Benefit Plan
IRS 412(i) Audit Initiative: Are All the Plans Bad? The ERISA Audit Report
Defined benefit pension plans funded with annuities and life insurance have been around for a long time. Given an exemption from the normal pension funding rules by Internal Revenue Code section 412(i) (now section 412(e) after the Pension Protection Act), nobody paid them much attention until the late 1990s and early 2000s. Then insurance agents started to market them heavily, and the IRS began to pay attention. In early 2004, it issued several Revenue Rulings and proposed regulations intended to curb what the IRS viewed as “abuses” – that is, plans that did not, in the IRS view, meet the 5 or 6 key requirements for 412(i) plans under the Code – and not long thereafter it started a sweeping audit initiative to eliminate abusive 412(i) plans.
The IRS is currently processing hundreds of these audits. The vast majority of the cases have not been resolved.
It will come as no shock to the benefits community if we say that a number of the plans under audit fail to meet all of the rules under section 412(i). At the same time, it is also fair to say that many of the rules that the IRS is now seeking to enforce weren’t clear when the plans were set up. But what may come as a surprise is that there are many plans that do meet the requirements. Unfortunately, under the audit initiative, these plans are being lumped together with the non-compliant and abusive ones, and the taxpayers are being forced to spend significant sums defending their retirement funds.
We are currently handling the audits of a number of these plans. We discuss two examples below, but first let’s look at the background.
Background If a plan meets the requirements of section 412(i), the deductible contribution to the plan equals the premiums on the insurance contracts used to fund the benefits. You don’t need an actuary to calculate the funding contributions. To be a valid 412(i) plan, the law requires, among other things, that the benefit promised at normal retirement age under the plan be equal to the benefit provided under the insurance contracts used to fund the plan and guaranteed by a domestic insurance carrier. It also requires, according to the IRS position developed during the audit process, that every form of benefit provided for in the insurance contracts (i.e., life annuities, joint and survivor annuities, period certain annuities, lump sum benefits) is equivalent to every form offered as an option in the plan. And finally, there is a requirement that the death benefit provided by the plan be no greater than an “incidental” limit as permitted under IRS guidance.
But how do you know that the plan meets these requirements? Though this may seem counter-intuitive, you have to get an actuary to do a series of calculations. When a 412(i) plan is funded with a combination of the cash surrender value of life insurance policies and the value of annuity contracts, it takes an actuary to certify that the amount promised under the terms of the plan and the amount guaranteed by the insurance contracts are equal. The issue is even more complicated if the plan offers insurance policies providing for lump sum payments calculated using actuarial equivalents.
All very interesting, but how do you apply this to a real 412(i) plan under audit?
Two Examples These two cases illustrate that there really are valid 412(i) plans despite the IRS assertion that they are all bad and tha
EDUCATION MEMBERSHIP NEWS ADVOCACY RESOURCES EMAIL|PRINT| More Sharing Services SHARE Keep a Watchful Eye: Tax Avoidance Can Lurk in Employee Benefit Plans
November 1, 2008
By Lance Wallach,CLU, ChFC
As the Internal Revenue Service (IRS) continues to crack down on abusive retirement and employee benefit plans, many accountants will almost certainly, though inadvertently, land their clients and themselves in trouble.
Two particular types of arrangements top the IRS list of abusive plans: the so-called 419 insurance welfare benefit plan and the 412(i) d
IRS 412(i) Audit Initiative: Are All the Plans Bad?
ReplyDeleteThe ERISA Audit Report
Defined benefit pension plans funded with annuities and life insurance have been around for a long time. Given an exemption from the normal pension funding rules by Internal Revenue Code section 412(i) (now section 412(e) after the Pension Protection Act), nobody paid them much attention until the late 1990s and early 2000s. Then insurance agents started to market them heavily, and the IRS began to pay attention. In early 2004, it issued several Revenue Rulings and proposed regulations intended to curb what the IRS viewed as “abuses” – that is, plans that did not, in the IRS view, meet the 5 or 6 key requirements for 412(i) plans under the Code – and not long thereafter it started a sweeping audit initiative to eliminate abusive 412(i) plans.
The IRS is currently processing hundreds of these audits. The vast majority of the cases have not been resolved.
It will come as no shock to the benefits community if we say that a number of the plans under audit fail to meet all of the rules under section 412(i). At the same time, it is also fair to say that many of the rules that the IRS is now seeking to enforce weren’t clear when the plans were set up. But what may come as a surprise is that there are many plans that do meet the requirements. Unfortunately, under the audit initiative, these plans are being lumped together with the non-compliant and abusive ones, and the taxpayers are being forced to spend significant sums defending their retirement funds.
We are currently handling the audits of a number of these plans. We discuss two examples below, but first let’s look at the background.
Background
If a plan meets the requirements of section 412(i), the deductible contribution to the plan equals the premiums on the insurance contracts used to fund the benefits. You don’t need an actuary to calculate the funding contributions. To be a valid 412(i) plan, the law requires, among other things, that the benefit promised at normal retirement age under the plan be equal to the benefit provided under the insurance contracts used to fund the plan and guaranteed by a domestic insurance carrier. It also requires, according to the IRS position developed during the audit process, that every form of benefit provided for in the insurance contracts (i.e., life annuities, joint and survivor annuities, period certain annuities, lump sum benefits) is equivalent to every form offered as an option in the plan. And finally, there is a requirement that the death benefit provided by the plan be no greater than an “incidental” limit as permitted under IRS guidance.
But how do you know that the plan meets these requirements? Though this may seem counter-intuitive, you have to get an actuary to do a series of calculations. When a 412(i) plan is funded with a combination of the cash surrender value of life insurance policies and the value of annuity contracts, it takes an actuary to certify that the amount promised under the terms of the plan and the amount guaranteed by the insurance contracts are equal. The issue is even more complicated if the plan offers insurance policies providing for lump sum payments calculated using actuarial equivalents.
All very interesting, but how do you apply this to a real 412(i) plan under audit?
Two Examples These two cases illustrate that there really are valid 412(i) plans despite the IRS assertion that they are all bad and tha
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Keep a Watchful Eye: Tax Avoidance Can Lurk in Employee Benefit Plans
November 1, 2008
By Lance Wallach,CLU, ChFC
As the Internal Revenue Service (IRS) continues to crack down on abusive retirement and employee benefit plans, many accountants will almost certainly, though inadvertently, land their clients and themselves in trouble.
Two particular types of arrangements top the IRS list of abusive plans: the so-called 419 insurance welfare benefit plan and the 412(i) d