- Investment News
Financial advisors 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, advisors 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 advisors 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 advisors who sold these plans to small businesses 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 advisors 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 advisor 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 advisor, 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 advisors that sold these plans to them.
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Lance Wallach
Lance Wallach
Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
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FEATURE
TAX / EMPLOYEE BENEFITS
Abusive Insurance and Retirement Plans
Single–employer section 419 welfare benefit plans are the latest incarnation in insurance deductions the IRS deems abusive
BY LANCE WALLACH
September 1, 2008
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TOPICS
Personal Financial Planning
Retirement Planning
Tax
Employee Benefits
EXECUTIVE SUMMARY
Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the IRS has deemed abusive. Many of these plans have been sold by promoters in conjunction with life insurance companies.
As long ago as 1984, with the addition of IRC §§ 419 and 419A, Congress and the IRS took aim at unduly accelerated deductions and other perceived abuses. More recently, with guidance and a ruling issued in fall 2007, the Service declared as abusive certain trust arrangements involving cash-value life insurance and providing post-retirement medical and life insurance benefits.
The new "more likely than not" penalty standard for tax preparers under IRC § 6694 raises the stakes for CPAs whose clients may have maintained or participated in such a plan. Failure to disclose a listed transaction carries particularly severe potential penalties.
Lance Wallach, CLU, ChFC, CIMC, is the author of the AICPA’s The Team Approach to Tax, Financial and Estate Planning. He can be reached at lawallach@aol.com or on the Web at, www.vebaplan.com or 516-938-5007. The information in this article is not intended as accounting, legal, financial or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for such advice.
Many of the listed transactions that can get your clients into trouble with the IRS are exotic shelters that relatively few practitioners ever encounter. When was the last time you saw someone file a return as a Guamanian trust (Notice 2000-61)? On the other hand, a few listed transactions concern relatively common employee benefit plans the IRS has deemed tax-avoidance schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially in small business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan.
Some of these abusive employee benefit plans are represented as satisfying section 419 of the Code, which sets limits on purposes and balances of “qualified asset accounts” for such benefits, but purport to offer deductibility of contributions without any corresponding income. Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5).