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| by Lance Wallach |
IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans. The IRS has attacked 412i, 419 plans for years. As a result promoters are now promoting section 79 and captive insurance plans. They are just starting to be attacked by the IRS.
A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products.
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions. If they were cancelled within a few years of purchase the had very little cash value.
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions. If they were cancelled within a few years of purchase the had very little cash value.
The IRS clarified three important points for pension plans that use life insurance in February 2004:
ReplyDelete1. A tax-qualified pension plan may not provide life insurance benefits in excess of the previously stated maximums. In general, this maximum amount is 100 times the monthly pension benefit.
2. The cost of life insurance that is more than the allowable amount is not tax deductible as a current year’s contribution to the retirement plan.
3. Life insurance contracts may not be sold or transferred out of a pension plan for the amount of their cash value that is significantly less than the amount paid for the insurance policy.
While pension plans may contain some life insurance to provide incidental death benefits, some life insurance promoters have used life insurance almost exclusively to fund pension plan benefits. Some companies incorrectly promoted life insurance policies as a way to increase tax-deductible contributions to a pension plan. The IRS has consistently held that such practices were abusive. The current rulings issued in February 2004 are designed to clarify these positions. Details can be found in Revenue Ruling 2004-20, 2004-21 and Revenue Procedure 1004-16.
Business owners with pension plans that are funded primarily with life insurance should seek advice from a source other than the life insurance sales system. Those who relied on advisory or legal services provided by the life insurance company may wish to raise the question as to whether the advice was objective and consistent with industry standards.
Some businesses will eventually be hurt financially by enforcement of these new revenue rulings. Attorneys seeking to substantiate charges of improper sales practices may wish to gather evidence of IRS statements and industry publications on the topic of these abusive practices issued prior to the date of sale of the life insurance policy.