IRS Tax Shelters and 419 Plans Litigation
412i, 419e plans litigation and IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS.
During the past few years the Internal Revenue Service (IRS) has aggressively…
412(i) and 419A(f)(6) Over the past few years we have reviewed a number of 412(i), and before that 419A(f)(6), proposals that were brought to us by insurance agents. Luckily for the client, and insurance agent, we were able to “convert” the 412(i) plans to regular Defined Benefit Plans, with or without insurance, in such a manner that no deductions were lost. Regarding 419A(f)(6) we advised the client that getting an IRS approval letter would not happen and that this type of plan should be implemented only after exhausting all efforts in obtaining a qualified plan where the deductions would stand. “412(i) PLANS
Section 412(i) of the IRC says that if you have a fully insured plan (all assets are in life insurance and or annuities with a commercial carrier) you can rely on the issuing insurance company guaranteed interest rates for purposes of developing the contributions. During the period of the Small Plan Actuarial Audit Program wherein the IRS was attempting to require the use of interest rates of not less than 8% and retirement ages of not less than 65, the prospect of a fully insured 412(i) plan looked enticing. A 4% interest assumption for a 45 year old retiring at 65 compared to an 8% interest assumption meant a contribution increase of 60%. However, when the IRS lost its case in Tax Court (12 out of 13 Tax court judges ruled against the IRS. One of the judges abstained because he “didn’t know enough about the subject”), actuaries routinely began to use a 5% interest assumption (or 4% in special circumstances). A 4% interest assumption generates a contribution in the above example of only 12% more than what is obtainable with a 5% interest assumption. Immediately, the “interest” advantage of a 412(i) plan was minimized. However, it is important to note that when a 412(i) plan prematurely terminates, the plan suffers a large decrease in the surrender values, which pays for commissions and the cost of medicals and underwriting. Additionally, there can be no investments of the plan other than in insurance products—no mutual funds, stocks, bonds, real estate, collectables, etc. Employee costs can
412(i) and 419A(f)(6)
ReplyDeleteOver the past few years we have reviewed a number of 412(i), and before that 419A(f)(6),
proposals that were brought to us by insurance agents. Luckily for the client, and insurance
agent, we were able to “convert” the 412(i) plans to regular Defined Benefit Plans, with or
without insurance, in such a manner that no deductions were lost. Regarding 419A(f)(6) we
advised the client that getting an IRS approval letter would not happen and that this type of plan
should be implemented only after exhausting all efforts in obtaining a qualified plan where the
deductions would stand.
“412(i) PLANS
Section 412(i) of the IRC says that if you have a fully insured plan (all assets are in life insurance
and or annuities with a commercial carrier) you can rely on the issuing insurance company
guaranteed interest rates for purposes of developing the contributions.
During the period of the Small Plan Actuarial Audit Program wherein the IRS was attempting to
require the use of interest rates of not less than 8% and retirement ages of not less than 65, the
prospect of a fully insured 412(i) plan looked enticing. A 4% interest assumption for a 45 year
old retiring at 65 compared to an 8% interest assumption meant a contribution increase of 60%.
However, when the IRS lost its case in Tax Court (12 out of 13 Tax court judges ruled against
the IRS. One of the judges abstained because he “didn’t know enough about the subject”),
actuaries routinely began to use a 5% interest assumption (or 4% in special circumstances). A
4% interest assumption generates a contribution in the above example of only 12% more than
what is obtainable with a 5% interest assumption. Immediately, the “interest” advantage of a
412(i) plan was minimized.
However, it is important to note that when a 412(i) plan prematurely terminates, the plan suffers
a large decrease in the surrender values, which pays for commissions and the cost of medicals
and underwriting. Additionally, there can be no investments of the plan other than in insurance
products—no mutual funds, stocks, bonds, real estate, collectables, etc. Employee costs can