Investment News - Lance Wallach - 412i and 419 plan litigatation

 Investment News
Five-year-old change in tax has left some small businesses and certain benefit plans subject to IRS fines; the advisors who sold these plans may pay the price.

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.

Investment News - Lance Wallach - 412i and 419 plan litigatation

IRS Secrets You Should Know by Lance Wallach (+playlist)

More Problems for 419 Plans

For years, life insurance companies and agents have tried to find ways of making life insurance premiums paid by business owners tax deductible. This would allow them to sell policies at a "discount."

The problem became acute a few years ago with outlandish claims about how §§419A(f)(5) and (6) of the Internal Revenue Code (IRC) exempted employers from any tax deduction limitations. Other inaccurate assertions were made as well, until the Internal Revenue Service (IRS) finally put a stop to such egregious misrepresentations in 2002 by issuing regulations and naming such plans as "potentially abusive tax shelters" (or "listed transactions") that needed to be registered and disclosed to the IRS.

This appeared to put an end to the scourge of scurrilous promoters, as many such plans disappeared from the landscape.

And what happened to the providers that were peddling §§419A(f)(5) and (6) life insurance plans a few years ago? We recently found the answer: Most of them found a new life as promoters of so-called "419(e)" welfare benefit plans.


READ THE REST HERE

Lance Wallach - IRS Secrets You Should Know (+playlist)

IRS Penalties, Audits, Benefit Plans 419e 412i

Section 79 - HG.org

For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company).

Beginning this article, I wanted to reiterate my comments on implementing plans with fewer than 10 employees.



Amazingly, one of the insurance companies offering this plan seemly doesn't have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you'll want to stay far away from.



As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan. 

To continue reading, click here

Captive Insurance, Buyer Beware - HG.org

Captive Insurance, Buyer Beware - HG.org





Closely-Held Insurance Company structures, known as "CHICs", are sometimes used to purchase life insurance outside the estate of the business owner with what amounts to pre-tax dollars. This should not be the primary focus of the captive, but is something that can be done with a portion of the captive's accumulated assets.

IRS TAX DOG

IRS TAX DOG


THE IRS TAX DOG WILL PROTECT YOU FROM THE MEAN IRS SCARE TACTICS USED BY THE MEAN TEAM AT THE IRS~!

How to Get Fined $100,000 by the IRS and Lose Your License - HG.org

How to Get Fined $100,000 by the IRS and Lose Your License - HG.org

Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes, while simultaneously 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 the marketing and selling of aggressive and non-compliant plans.

Lance Wallach on 419, 412i, and more

Lance Wallach, CLU, CHFC Expert Witness - HG.org

Lance Wallach, CLU, CHFC Expert Witness - HG.org

Reportable Transactions &; 419 Plans Litigation: CJA and associates 419, 412i section 79, audits for scams

419 and 412i Plan Help

EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419

Notice 95-34 discusses tax problems raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple employer welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A.  There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund.
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all employers, and the plan must not be experience rated with respect to individual employers.
Promoters have offered trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).

In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).

Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans CPA’s Guide to Life Insurance

Author/Moderator: Lance Wallach, CLU, CHFC, CIMC

Below is an excerpt from one of Lance Wallach’s new books.

Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans

                        One popular type of listed transaction is the so-called “welfare benefit plan,” which once relied on IRC §419A(f)(6) for its authority to claim tax deductions, but now more commonly relies on IRC §419(e).  The IRC §419A(f)(6) plans used to claim that the section completely exempted business owners from all limitations on how much tax could be deducted.  In other words, it was claimed, tax deductions were unlimited.  These plans featured large amounts of life insurance and accompanying large com­missions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys.  Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.

IRS Attacks Business Owners, Accountants, Lawsuits over 412(i)/419 and Similar Insurance Based Plans

A 412(i) plan is a “defined benefit plan” – a retirement plan, a pension plan that claims to offer very large tax deductions. It is funded with annuity and life insurance products.

Late 1990's/early 2000's, agents sold life insurance, and annuity policies to fund such plans. 

Type of policy typically had high surrender charges, depressed cash value in early years - premiums paid by employer

After premiums funded for a few years, employee purchases policy for the current depressed cash surrender value

After policy purchased, surrender charges dramatically reduced, cash value “springs” to a high level 

Employee could then borrow from high value policy for tax-free cash flow. They were called springing cash value policies.

Not all policies were of that type.

In 1995 IRS issued IRS notice 9534 warning that they would come after 419 plans. In 2004/2005, IRS began investigating and issued regulations deeming such plans as abusive tax shelters - began nationwide audits of such plans. 

Plaintiffs in these matters are typically professional groups (doctors, dentists, small business owners) audited by the IRS - plans deemed abusive tax shelters – subject to substantial fees and penalties. Participants must file under IRS 6707A to avoid additional large fines. Material advisors, people that sold the plans and accountants that gave tax advice and got paid also get fined a minimum of $100,000 if they do not properly file and tell on their client.

Professionals then file suit against insurance companies and agents claiming they were misled in the sale of these plans and policies. 

Allegations typically: 

defendants represented that policies used to fund plans would be valid and subject to favorable future tax consequences

To Date - Mixed Results for Carriers:

1. Breach of contract 

Claim dismissed - contract never promised to satisfy § 412 requirements, specifically stated that it did not guarantee any future tax consequences. Zarrella v. Pacific Life, 755 F. Supp. 2d 1231 (S.D. FL March 29, 2011) (Florida law) 

Claim allowed to proceed - allegations pled existence of written and oral contracts promising tax benefits. Chau v. Aviva Life, 2011 U.S. Dist. LEXIS 54828 (N.D. Tex May 20, 2011) (applying Washington law).

2. Negligence 

Claim dismissed because carrier is under no duty to advise its insured’s regarding tax consequences of transactions. Zarrella v. Pacific Life, (S.D. FL March 29, 2011).

3. Fraud/Misrepresentation 

A. Future statements: 

alleged misrepresentations made before the IRS pronouncements calling into question tax benefits of the various plans generally dismissed on grounds: 

(i) statements were not false when made, or 

(ii) statements were mere opinions or predictions that are not actionable. 

Berry v. Indianapolis Life, 608 F. Supp. 2d 785 (N.D. Tex. 2009, August 26, 2010) 

Zarrella v. Pacific Life, 755 F. Supp. 2d 1231 (S.D. FL March 29, 2011) 

Chau v. Aviva Life, 2011 U.S. Dist. LEXIS 54828 (N.D. Tex May 20, 2011) 

Courts generally determine that statements made by agents prior to 2004/2005 are “forward-looking” statements or “opinions” and that “as a matter of law, any representation or prediction by any alleged agent as to how the IRS would treat the 412(i) plans and finding thereof in the future is either an unactionable opinion or was unjustifiably relied upon.” Berry v. Indianapolis Life 

To Date - Mixed Results for Carriers:

B. “Disclaimer of Reliance” defense – results mixed 

Typically, in the plan documents, participant agrees he is not relying on carrier’s representations regarding the validity of the plan or its tax benefits - instead relying on own independent tax advisor

Cal. law – signed disclosure statements by plaintiffs preclude reasonable reliance on representations as a matter of law - claim dismissed. 

Berry v. Indianapolis Life 

Omni Home v. Hartford Life, 2008 Dist. LEXIS 35259 (S.D. Cal. April 29, 2008). 

Texas and Wisconsin law – disclosure documents do not preclude reliance as a matter of law. Berry v. Indianapolis Life

To date, success in dismissing claims depends upon the different courts, and applicable governing law.

Note: If alleged misrepresentations made after applicable IRS pronouncement, then representations are not predictions or opinions, but rather statements regarding the existing state of the law – probably allowed to proceed.
Source

412i, 419, Captive Insurance and Section 79 Plans

412i, 419, Captive Insurance and Section 79 Plans