Enrolled Agents Journal March*April 2006
A Rose By Any Other Name, or
Whatever Happened to All Those 419A(f)(6) Providers?
By Ronald H. Snyder, JD, MAAA, EA & Lance Wallach, CLU, ChFC, CIMC
For years promoters of life insurance companies and agents have tried to find ways of claiming that the premiums paid by business owners were tax deductible. This allowed them to sell policies at a “discount”.
The problem became especially bad a few years ago with all of the outlandish claims about how §§419A(f)(5) and 419A(f)(6) exempted employers from any tax deduction limits. Many other inaccurate statements were made as well, until the IRS finally put a stop to such assertions by issuing regulations and naming such plans as “potentially abusive tax shelters” (or “listed transactions”) that needed to be disclosed and registered. This appeared to put an end to the scourge of such scurrilous promoters, as such plans began to disappear from the landscape.
And what happened to all the providers that were peddling 419A(f)(5) and (6) life insurance plans a couple of years ago? We recently found the answer: most of them found a new life as promoters of so-called “419(e)” welfare benefit plans.
We recently reviewed several §419(e) plans, and it appears that many of them are nothing more than recycled §419A(f)(5) and §419A(f)(6) plans.
The “Tax Guide” written by one vendor’s attorney is illustrative: he confuses the difference between a “multi-employer trust” (a Taft-Hartley, collectively-bargained plan), a “multiple-employer trust” (a plan with more than one unrelated employer) and a “10-or-more employer trust” (a plan seeking to comply with IRC §419A(f)(6)).
Background: Section 419 of the Internal Revenue Code
Section 419 was added to the Internal Revenue Code (“IRC”) in 1984 to curb abuses in welfare benefit plan tax deductions. §419(a) does not authorize tax deductions, but provides as follows: “Contributions paid or accrued by an employer to a welfare benefit fund * * * shall not be deductible under this chapter * * *.”. It simply limits the amount that would be deductible under another IRC section to the “qualified cost for the taxable year”. (§419(b))
Section 419(e) of the IRC defines a “welfare benefit fund” as “any fund-- (A) which is part of a plan of an employer, and (B) through which the employer provides welfare benefits to employees or their beneficiaries.” It also defines the term "fund", but excludes from that definition “amounts held by an insurance company pursuant to an insurance contract” under conditions described.
None of the vendors provides an analysis under §419(e) as to whether or not the life insurance policies they promote are to be included or excluded from the definition of a “fund”. In fact, such policies will be included and therefore subject to the limitations of §§419 and 419A.
Errors Commonly Made
Materials from the various plans commonly make several mistakes in their analyses:
1. They claim not to be required to comply with IRC §505 non-discrimination requirements. While it is true that §505 specifically lists “organizations described in paragraph (9) or (20) of section 501(c)”, IRC §4976 imposes a 100% excise tax on any “post-retirement medical benefit or life insurance benefit provided with respect to a key employee” * * * “unless the plan meets the requirements of section 505(b) with respect to such benefit (whether or not such requirements apply to such plan).” (Italics added) Failure to comply with §505(b) means that the plan will never be able to distribute an insurance policy to a key employee without the 100% penalty!
2. Vendors commonly assert that contributions to their plan are tax deductible because they fall within the limitations imposed under IRC §419; however, §419 is simply a limitation on tax deductions. Providers must cite the section of the IRC under which contributions to their plan would be tax-deductible. Many fail to do so. Others claim that the deductions are ordinary and necessary business expense under §162, citing Regs. §1.162-10 in error: there is no mention in that section of life insurance or a death benefit as a welfare benefit.
3. The reason that promoters fail to cite a section of the IRC to support a tax deduction is because, once such section is cited, it becomes apparent that their method of covering only selected key and highly-compensated employees for participation in the plan fails to comply with IRC §414(t) requirements relative to coverage of controlled groups and affiliated service groups.
4. Life insurance premiums could be treated as W-2 wages and deducted under §162 to the extent they were reasonable. Other than that, however, no section of the Internal Revenue Code authorizes tax deductions for a discriminatory life insurance arrangement. IRC §264(a) provides that “[n]o deduction shall be allowed for * * * [p]remiums on any life insurance policy * * * if the taxpayer is directly or indirectly a beneficiary under the policy.” As was made clear in the Neonatology case (Neonatology Associates v. Commissioner, 115 TC 5, 2000), the appropriate treatment of employer-paid life insurance premiums under a putative welfare benefit plan is under §79, which comes with its own nondiscrimination requirements.
5. Some plans claim to impute income for current protection under the PS 58 rules. However, PS58 treatment is available only to qualified retirement plans and split-dollar plans. (Note: none of the 419(e) plans claim to comply with the split-dollar regulations.) Income is imputed under Table I to participants under Group-Term Life Insurance plans that comply with §79. This issue is addressed in footnotes 17 and 18 of the Neonatology case.
6. Several of the plans claim to be exempt from ERISA. They appear to rely upon the ERISA Top-Hat exemption (applicable to deferred compensation plans). However, that only exempts a plan from certain ERISA requirements, not ERISA itself. It is instructive that none of the plans claiming exemption from ERISA has filed the Top-Hat notification with the Dept. of Labor.
7. Some of the plans offer severance benefits as a “welfare benefit”, which approach has never been approved by the IRS. Other plans offer strategies for obtaining a cash benefit by terminating a single-employer trust. The distribution of a cash benefit is a form of deferred compensation, yet none of the plans offering such benefit complies with the IRC §409A requirements applicable to such benefits.
8. Some vendors permit participation by employees who are self-employed, such as sole proprietors, partners or members of an LLC or LLP taxed as a partnership. This issue was also addressed in the Neonatology case where contributions on behalf of such persons were deemed to be dividends or personal payments rather than welfare benefit plan expenses.
[Note: bona fide employees of an LLC or LLP that has elected to be taxed as a corporation may participate in a plan.]
9. Most of the plans fail under §419 itself. §419(c) limits the current tax deduction to the “qualified cost”, which includes the “qualified direct cost” and additions to a “qualified asset account” (subject to the limits of §419A(b)). Under Regs. §1.419-1T, A-6, “the "qualified direct cost" of a welfare benefit fund for any taxable year * * * is the aggregate amount which would have been allowable as a deduction to the employer for benefits provided by such fund during such year (including insurance coverage for such year) * * *.” “Thus, for example, if a calendar year welfare benefit fund pays an insurance company * * * the full premium for coverage of its current employees under a term * * * insurance policy, * * * only the portion of the premium for coverage during [the year] will be treated as a "qualified direct cost" * * *.” (Italics added)
Most vendors pretend that the whole or universal life insurance premium is an appropriate measurement of cost for Key Employees, and those plans that cover rank and file employees use current term insurance premiums as the appropriate measure of cost for such employees. This approach doesn’t meet any set of nondiscrimination requirements applicable to such plans.
10. Some vendors claim that they are justified in providing a larger deduction than the amount required to pay term insurance costs for the current tax year, but, as cited above, the only justification under §419(e) itself is as additions to a qualified asset account and is subject to the limitations imposed by §419A. In addition, §419A adds several additional limitations to plans and contributions, including requirements that:
A. contributions be limited to a safe harbor amount or be certified by an actuary as to the amount of such contributions (§419A(c)(5));
B. actuarial assumptions be “reasonable in the aggregate” and that the actuary use a level annual cost method (§419A(c)(2));
C. benefits with respect to a Key Employee be segregated and their benefits can only be paid from such account (§419A(d));
D. the rules of subsections (b), (c), (m), and (n) of IRC section 414 shall apply to such plans (§419A(h)).
E. the plan comply with §505(b) nondiscrimination requirements (§419A(e)).
Circular 230 Issues
Circular 230 imposes many requirements on tax professionals with respect to tax shelter transactions. A tax practitioner can get into trouble in the promotion of such plans, in advising clients with respect to such transactions and in preparing tax returns. IRC §§6707 and 6707A add a new concept of “reportable transactions” and impose substantial penalties for failure to disclose participation in certain reportable transactions (including all listed transactions).
This is a veritable minefield for tax practitioners to negotiate carefully or avoid altogether. The advisor must exercise great caution and due diligence when presented with any potential contemplated tax reduction or avoidance transaction. Failure to disclose could subject taxpayers and their tax advisors to potentially Draconian penalties.
Summary
Key points of this article include:
· Practitioners need to be able to differentiate between a legitimate §419(e) plan and one that is legally inadequate when their client approaches them with respect to such plan or has the practitioner to prepare his return;
· Many plans incorrectly purport to be exempt from compliance with ERISA, IRC §§414, 505, 79, etc.
· Tax deductions must be claimed under an authorizing section of the IRC and are limited to the qualified direct cost and additions to a qualified asset account as certified by the plan’s actuary.
Conclusion
Irresponsible vendors such as most of the promoters who previously promoted IRC §419A(f)(6) plans were responsible for the IRS’s issuing restrictive regulations under that Section. Now many of the same individuals have elected simply to claim that a life insurance plan is a welfare benefit plan and therefore tax-deductible because it uses a single-employer trust rather than a "10-or-more-employer plan".
This is an open invitation to the IRS to issue new onerous Regulations and more indictments and legal actions against the unscrupulous promoters who feed off of the naivety of clients and the greed of life insurance companies who encourage and endorse (and even own) such plans.
The last line of defense of the innocent client is the accountant or attorney who is asked by a client to review such arrangement or prepare a tax return claiming a deduction for contributions to such a plan. Under these circumstances accountants and attorneys should be careful not to rely upon the materials made available by the plan vendors, but should review any proposed plan thoroughly, or refer the review to a specialist.
Ron Snyder practices as an ERISA attorney and Enrolled Actuary in the field of employee benefits.
Lance Wallach speaks and writes extensively about VEBAs retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually and writes for more than 50 publications. For more information and additional articles on these subjects, call 516-938-5007 or visit www.vebaplan.com..
This information 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.
Showing posts with label audit. Show all posts
Showing posts with label audit. Show all posts
Insurance swap-outs trade old policies for new ones
ACCOUNTING TODAY: Oct. 16. - Nov. 5, 2006
Do you have any clients who complain that their life insurance was supposed to be paid up by now, but it isn’t? Notices from their insurance companies may even indicate that their suggested premium payment has increased, or that their policies are about to lapse.
Do you have clients whose “investment type” life insurance policy is not performing as projected? Ever have clients cancel their life insurance and get a taxable statement of gain? This can even happen if their policy lapses and they get nothing back (they had a paper gain). This is becoming more common.
There are many reasons why it may be advantageous for the owner of a cash value life insurance policy to swap out the policy for a new one. These reasons include reducing premium payments substantially, the insured’s improved health, a change in the rating of the insurance company, competitive terms of a new policy, increasing the death benefit while making the same payment, increase of the
endowment age for the insured, change in the insured’s financial situation, and many more.
Instead of cashing in a value life insurance policy and purchasing a new one, a policy-owner should use the process of the insurance swapoutsm on the policies. By doing so, a policyowner can roll the exiting cash value insurance policy into a new one without paying taxes on the growth in the old policy’s cash value. In contrast, if the policyowner were to cancel the policy, she would be subject to paying income tax on the cash value in excess of premiums paid into the policy.
An insurance swapoutsm also allows the policyowner to carry over the original basis, which is used to calculate income taxes due upon receiving distributions from the policy’s cash value. Maintaining the original basis can be especially beneficial in the initial contract years of the policy, when the premiums paid may exceed the policy’s cash value.
As an example, a life insurance policy on which the owner has paid $30,000 in premiums has a cash value of $20,000. If the owner were to surrender the policy and buy a new one with the proceeds, the basis in the new policy would be $20,000. With an insurance swapoutsm, however, the basis would remain at $30,000.
Because people are living longer, and due to the insurance marketplace having become more efficient and competitive, the cost of death protection on new policies is usually lower than on older policies. Clients with old policies that don’t reflect updated mortality experience may benefit by swapping them for policies with lower premiums or higher death benefits. One problem with older policies is that they were illustrated at high interest rates that probably would not last indefinitely. These policies might have illustrated being paid up in, say, 11 years, and when interest rates dropped, premiums had to be paid for, in some cases, twice as long.
An insurance swapoutsm is the most efficient way to accomplish various fundamental insurance planning goals. Don’t attempt this on your own, and be wary of your local insurance agent who may say he can help. The result may be a large tax bill. Under Internal Revenue Code Section 1035, insurance can be exchanged for insurance or annuities.
However, because such exchanges are complicated, there are many mistakes that can be made. Any mistake may make the exchange useless or, worse, taxable (in a gain situation). There is also a liability issue. Section 1035 does not require state insurance department replacement forms to be filed. But the filing and analysis of state insurance department replacement forms are part of the insurance swapoutsm procedure. So is the analysis of new acquisition costs, cancellation penalties, new contestability periods, etc. … The swapout should only be recommended if the advantages outweigh the disadvantages.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about financial planning, retirement plans, and tax reduction strategies. National Society of Accountants Speaker of the Year. For more information and additional articles on these subjects, call 516/938-5007 or visit www.vebaplan.com.
The information provided herein 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.
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The Insurance Swapoutsm was created by Gary B. Garland, Esq. and the trademark is owned by Gary B. Garland, Esq. All rights reserved.
Do you have any clients who complain that their life insurance was supposed to be paid up by now, but it isn’t? Notices from their insurance companies may even indicate that their suggested premium payment has increased, or that their policies are about to lapse.
Do you have clients whose “investment type” life insurance policy is not performing as projected? Ever have clients cancel their life insurance and get a taxable statement of gain? This can even happen if their policy lapses and they get nothing back (they had a paper gain). This is becoming more common.
There are many reasons why it may be advantageous for the owner of a cash value life insurance policy to swap out the policy for a new one. These reasons include reducing premium payments substantially, the insured’s improved health, a change in the rating of the insurance company, competitive terms of a new policy, increasing the death benefit while making the same payment, increase of the
endowment age for the insured, change in the insured’s financial situation, and many more.
Instead of cashing in a value life insurance policy and purchasing a new one, a policy-owner should use the process of the insurance swapoutsm on the policies. By doing so, a policyowner can roll the exiting cash value insurance policy into a new one without paying taxes on the growth in the old policy’s cash value. In contrast, if the policyowner were to cancel the policy, she would be subject to paying income tax on the cash value in excess of premiums paid into the policy.
An insurance swapoutsm also allows the policyowner to carry over the original basis, which is used to calculate income taxes due upon receiving distributions from the policy’s cash value. Maintaining the original basis can be especially beneficial in the initial contract years of the policy, when the premiums paid may exceed the policy’s cash value.
As an example, a life insurance policy on which the owner has paid $30,000 in premiums has a cash value of $20,000. If the owner were to surrender the policy and buy a new one with the proceeds, the basis in the new policy would be $20,000. With an insurance swapoutsm, however, the basis would remain at $30,000.
Because people are living longer, and due to the insurance marketplace having become more efficient and competitive, the cost of death protection on new policies is usually lower than on older policies. Clients with old policies that don’t reflect updated mortality experience may benefit by swapping them for policies with lower premiums or higher death benefits. One problem with older policies is that they were illustrated at high interest rates that probably would not last indefinitely. These policies might have illustrated being paid up in, say, 11 years, and when interest rates dropped, premiums had to be paid for, in some cases, twice as long.
An insurance swapoutsm is the most efficient way to accomplish various fundamental insurance planning goals. Don’t attempt this on your own, and be wary of your local insurance agent who may say he can help. The result may be a large tax bill. Under Internal Revenue Code Section 1035, insurance can be exchanged for insurance or annuities.
However, because such exchanges are complicated, there are many mistakes that can be made. Any mistake may make the exchange useless or, worse, taxable (in a gain situation). There is also a liability issue. Section 1035 does not require state insurance department replacement forms to be filed. But the filing and analysis of state insurance department replacement forms are part of the insurance swapoutsm procedure. So is the analysis of new acquisition costs, cancellation penalties, new contestability periods, etc. … The swapout should only be recommended if the advantages outweigh the disadvantages.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about financial planning, retirement plans, and tax reduction strategies. National Society of Accountants Speaker of the Year. For more information and additional articles on these subjects, call 516/938-5007 or visit www.vebaplan.com.
The information provided herein 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.
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The Insurance Swapoutsm was created by Gary B. Garland, Esq. and the trademark is owned by Gary B. Garland, Esq. All rights reserved.
TAX MATTERS: ABUSIVE INSURANCE PLANS GET RED FLAG
ABUSIVE INSURANCE PLANS GET RED FLAG
The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.
Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.
Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.
A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.
Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.
The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.
Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.
Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.
A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.
Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
From: NSA - National Society of Accountants- May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein 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.
NSA - National Society of Accountants- May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein 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.
NSA - National Society of Accountants- May 14, 2008
Advisers staring at a new ‘slew' of litigation from small-business clients
Advisers staring at a new ‘slew' of litigation from small-business clients The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
By Jessica Toonkel Marquez
October 14, 2009
Financial advisers who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.
For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.
However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.
Many companies and financial advisers didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.
The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
So advisers who sold these plans to small business are now slowly starting to become the target of litigation from employers who are subject to these fines.
“There is a slew of litigation already against advisers that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”
Mr. Wallach declined to cite any specific suits. But one adviser who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending.
“My legal and accounting bills last year were $864,000,” said the adviser, who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue us.”
Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.
In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”
But with so much of Congress' attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.
“If Congress doesn't amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisers that sold these plans to them,” said Kathleen Barrow.
Advisers staring at a new ‘slew' of litigation from small-business clients
Five-year-old change in tax has left some small businesses and certain benefit plans subject to
IRS fines; the advisers who sold these plans may pay the price.
By Jessica Toonkel Marquez
October 14, 2009
Financial advisers who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.
For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.
However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.
Many companies and financial advisers didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.
The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
So advisers who sold these plans to small business are now slowly starting to become the target of litigation from employers who are subject to these fines.
“There is a slew of litigation already against advisers that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”
Mr. Wallach declined to cite any specific suits. But one adviser who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending.
“My legal and accounting bills last year were $864,000,” said the adviser, who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue us.”
Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.
In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”
But with so much of Congress' attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.
“If Congress doesn't amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisers that sold these plans to them,” said Kathleen Barrow.
Advisers staring at a new ‘slew' of litigation from small-business clients
Five-year-old change in tax has left some small businesses and certain benefit plans subject to
IRS fines; the advisers who sold these plans may pay the price.
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