FBAR, OVDI, OPT-OUT, AMNESTY, 412i, 419e plans litigation and IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS,401K,IRS RED FLAG, 401KPENALTY
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the establishment and funding of some of these plans. As a practical matter, most of the targeted practices are found in smaller plans (1 to 15 participants). If the IRS is successful in attacking these practices, taxpayers that established these types of 412(i) plans in the last few years will face substantial taxes and penalties unless they properly present their positions in the audit process.
Over the past several years, the IRS has systematically escalated its challenge to “abusive” 412(i) plans. The chronology:
Beginning in the early 2000s, IRS officials began giving speeches at benefits conferences expressing the Service’s concern that 412(i) plans were being funded in a way that did not meet the letter or the spirit of the Internal Revenue Code. The officials commented that the IRS intended to take steps to prevent misuse of insurance products in qualified plans. The plans which seemed to generate the most IRS attention were those funded exclusively or almost exclusively with life insurance (as opposed to annuities or a mix of life insurance and annuities). This was especially true of plans using policies designed to have low initial cash surrender values and high premium costs for a fixed number of years. The IRS was also concerned about the sale or distribution of these policies from the plans to key employees, where artificially suppressed values were used. In February 2004, the IRS issued 412(i) guidance. The guidance covers: plans that discriminate in favor of the high paid through the types of insurance contracts held by the plan for their benefit; deductibility of premium contributions; and life insurance contract valuation issues. This guidance also placed certain plans on the IRS list of abusive tax transactions -– that is, plans funded with life insurance with a policy death benefit exceeding the permissible legal limits by $100,000 or more. Taxpayers who engage in “listed transactions” are required to report them to the IRS or face substantial penalties ($100,000 in the case of individuals and $200,000 in the case of entities). In addition, “material advisors” to these plans are required to maintain certain records and turn them over to the IRS on demand. Then, in October 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would have paid if it had not adopted the plan, plus interest and reduced penalties. (Altogether, 20 different types of employee benefit structures were included in this settlement initiative.) Finally, in late 2005, the IRS began an audit campaign targeting 412(i) plans. A sample of the types of information the IRS is requesting in these audits is attached. The following are some key areas of concern: Whether the plan has been funded to produce benefits that exceed the maximums under Code section 415. In defending an audit, it is essential for the taxpayer to obtain actuarial assistance i
CCH® PENSION — 12/29/11 ERISA preempted state law negligence and fiduciary breach claims against TPA ERISA preempted a small business owner's claim that a pension third party administrator acted negligently and breached its fiduciary duty with respect to its administration of the owner's "412(i)" plan, the U.S. Court of Appeals in Atlanta (CA-11) has ruled.
412(i) plan
A small business owner created a Code Sec. 412(i) plan in 2002. In 2003, a pension third party administrator took over as plan administrator. In 2004, the IRS issued new rules explaining that it would consider 412(i) plans with certain design features to be listed transactions, subject to serious penalties. The TPA determined the owner's plan to be at risk and drafted an amendment to correct the plan's problems. The business owner was not informed of the new IRS rules or the amendment (which was never adopted). The IRS audited the plan in 2006 and assessed significant penalties.
State law claims
The business owner filed suit in state court alleging, among other things, negligence and breach of fiduciary duty. The TPA successfully removed the action to federal court on ERISA preemption grounds. The business owner appealed.
Davila standard
The appellate court applied the Supreme Court's analysis in Aetna Health Inc. v. Davila to determine whether ERISA preempted the state law claims. It first considered whether the owner's claims fall within the enforcement mechanism under ERISA §502(a). The owner argued they did not, as the claims concerned the design and repair of the plan, and not its administration. The court conceded that not all of the owner's assertion's fell within ERISA's reach, but noted that the owner's claim of breach of fiduciary duty was clearly a potential claim under ERISA §409 (and thus eligible for enforcement under ERISA §502).
Turning to the second prong of the Davila analysis, the court determined that the legal duty the TPA was alleged to have breached --its fiduciary duty to the owner, as well as duties to disclose information --was dependent upon the existence of an ERISA plan. Thus, there was no independent claim that would have defeated ERISA preemption.
Arbitration claim
The court rejected the TPA's assertion that the business owner's claims were subject to arbitration. It's true the parties agreed to submit to arbitration any disputes regarding services as listed in "Section VI" of their agreement, but they failed to include a "Section VI" in the agreement.
Source: Ehlen Floor Covering, Inc. v. Innovative Pension Strategies, Inc. (CA-11).
IRS Targets 412(i) Plans
ReplyDeleteThe ERISA Audit Bulletin
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the establishment and funding of some of these plans. As a practical matter, most of the targeted practices are found in smaller plans (1 to 15 participants). If the IRS is successful in attacking these practices, taxpayers that established these types of 412(i) plans in the last few years will face substantial taxes and penalties unless they properly present their positions in the audit process.
Over the past several years, the IRS has systematically escalated its challenge to “abusive” 412(i) plans. The chronology:
Beginning in the early 2000s, IRS officials began giving speeches at benefits conferences expressing the Service’s concern that 412(i) plans were being funded in a way that did not meet the letter or the spirit of the Internal Revenue Code. The officials commented that the IRS intended to take steps to prevent misuse of insurance products in qualified plans. The plans which seemed to generate the most IRS attention were those funded exclusively or almost exclusively with life insurance (as opposed to annuities or a mix of life insurance and annuities). This was especially true of plans using policies designed to have low initial cash surrender values and high premium costs for a fixed number of years. The IRS was also concerned about the sale or distribution of these policies from the plans to key employees, where artificially suppressed values were used.
In February 2004, the IRS issued 412(i) guidance. The guidance covers: plans that discriminate in favor of the high paid through the types of insurance contracts held by the plan for their benefit; deductibility of premium contributions; and life insurance contract valuation issues. This guidance also placed certain plans on the IRS list of abusive tax transactions -– that is, plans funded with life insurance with a policy death benefit exceeding the permissible legal limits by $100,000 or more. Taxpayers who engage in “listed transactions” are required to report them to the IRS or face substantial penalties ($100,000 in the case of individuals and $200,000 in the case of entities). In addition, “material advisors” to these plans are required to maintain certain records and turn them over to the IRS on demand.
Then, in October 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would have paid if it had not adopted the plan, plus interest and reduced penalties. (Altogether, 20 different types of employee benefit structures were included in this settlement initiative.)
Finally, in late 2005, the IRS began an audit campaign targeting 412(i) plans. A sample of the types of information the IRS is requesting in these audits is attached. The following are some key areas of concern:
Whether the plan has been funded to produce benefits that exceed the maximums under Code section 415. In defending an audit, it is essential for the taxpayer to obtain actuarial assistance i
CCH® PENSION — 12/29/11
ReplyDeleteERISA preempted state law negligence and fiduciary breach claims against TPA
ERISA preempted a small business owner's claim that a pension third party administrator acted negligently and breached its fiduciary duty with respect to its administration of the owner's "412(i)" plan, the U.S. Court of Appeals in Atlanta (CA-11) has ruled.
412(i) plan
A small business owner created a Code Sec. 412(i) plan in 2002. In 2003, a pension third party administrator took over as plan administrator. In 2004, the IRS issued new rules explaining that it would consider 412(i) plans with certain design features to be listed transactions, subject to serious penalties. The TPA determined the owner's plan to be at risk and drafted an amendment to correct the plan's problems. The business owner was not informed of the new IRS rules or the amendment (which was never adopted). The IRS audited the plan in 2006 and assessed significant penalties.
State law claims
The business owner filed suit in state court alleging, among other things, negligence and breach of fiduciary duty. The TPA successfully removed the action to federal court on ERISA preemption grounds. The business owner appealed.
Davila standard
The appellate court applied the Supreme Court's analysis in Aetna Health Inc. v. Davila to determine whether ERISA preempted the state law claims. It first considered whether the owner's claims fall within the enforcement mechanism under ERISA §502(a). The owner argued they did not, as the claims concerned the design and repair of the plan, and not its administration. The court conceded that not all of the owner's assertion's fell within ERISA's reach, but noted that the owner's claim of breach of fiduciary duty was clearly a potential claim under ERISA §409 (and thus eligible for enforcement under ERISA §502).
Turning to the second prong of the Davila analysis, the court determined that the legal duty the TPA was alleged to have breached --its fiduciary duty to the owner, as well as duties to disclose information --was dependent upon the existence of an ERISA plan. Thus, there was no independent claim that would have defeated ERISA preemption.
Arbitration claim
The court rejected the TPA's assertion that the business owner's claims were subject to arbitration. It's true the parties agreed to submit to arbitration any disputes regarding services as listed in "Section VI" of their agreement, but they failed to include a "Section VI" in the agreement.
Source: Ehlen Floor Covering, Inc. v. Innovative Pension Strategies, Inc. (CA-11).