419 and 412i Plan Help: Retirement Plans

Showing posts with label Retirement Plans. Show all posts

Did you purchase a Section 79 plan and run into trouble? Lance Wallach, insurance expert witness services can provide the help you need with your insurance problems.

Did you purchase a Section 79 plan and run into trouble? Lance Wallach, insurance expert witness services can provide the help you need with your insurance problems.

http://www.section79help.com/

IRS Audit Assistance, Support, Expert Witness testimony

Nationwide Tax Resolution Sevices -With Attorneys-USA.org

Small Business Retirement Plans Fuel Litigation: Reportable Transactions & 419 Plans Litigation: CJ...

Small Business Retirement Plans Fuel Litigation: Reportable Transactions & 419 Plans Litigation: CJ...: Reportable Transactions & 419 Plans Litigation: CJA and associates 419 412i section 79 scam audits... : CJA and associates 419 412i sect...

Abusive Insurance and Retirement Plans

Retirement plans come under new IRS scrutiny

Retirement plans come under new IRS scrutiny

Click Here to Read In High Definition

Lance Wallach

Businesses should be aware that the Internal Revenue Service is increasing its examinations of companies'retirement plans, hoping to catch cheating their workers or the government, or both.

Pensions, profit-sharing plans and 401(k)s are all on the agenda.

The IRS intends to do about 9,000 of these focused examinations on companies of all sizes over the next nine months. Smaller businesses have more to fear; they are more likely to be out of compliance since they normally outsource set-up and administration.

Corporate pension plans have long been a target, but now the IRS appears to want to uncover more noncompliant and fraudulent plans. Knowing that smaller plans are more likely to be out of compliance, there has simply been a change in methodology. The agency no longer appears to look at all aspects of a given plan.

Instead, IRS agents now focus more on plan documents and internal controls (plan documents are examined to make sure they are current). Agents then focus on whether employers are properly handling various duties, including notifying workers of eligibility, matching employee contributions [in the case of 401(k) plans], calculating traditional benefits, investing, vesting workers and distributing benefits. By utilizing this somewhat streamlined approach, the IRS hopes to audit about 25 percent more plans this year than last.

Depending on circumstances and magnitude, those companies that are not in compliance could face sanctions ranging from fines up to closure.
Businesses should get an expert to review their retirement plans. This may also result in large cost savings, and recent changes in the law make more options available. Since the passage of the Pension Protection Act, for instance, cash balance plans have now been legitimized; these allow substantial contribution for owners and key executives while minimizing rank-and-file employee costs. In some cases, contributions can exceed salary for the key people.

Businesses should also consider a welfare benefit plan, which can yield large tax deductions and facilitate solutions to business succession and estate tax problems, among other things. Such plans often make items that are not normally deductible, such as life insurance premiums, tax deductible, and an employer can maintain a welfare benefit plan and a retirement plan simultaneously.

Lance Wallach is a frequent speaker at national conventions and writes for more than 50 national publications. Visit www.vebaplan.com or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

419, 412i, Captive Insurance and Section 79 Problems - HG.org

Captive Insurance

Will A Captive Insurance Plan Save You Money?

Call 5 1 6 - 9 3 8 - 5 0 0 7
Nationwide Assistance
WallachInc@gmail.com

Small Business Retirement Plans Fuel Litigation

Maryland Trial Lawyer
Dolan Media Newswires January

Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.

The penalties for such transactions are extremely high and can pile up quickly.

There are business owners who owe taxes but have been assessed 2 million in penalties. The existing cases involve many types of businesses, including doctors’ offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.

A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a “springing cash value,” meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.

Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums – 80 to 110 percent of the first year’s premium, which could exceed million.

Technically, the IRS’s problems with the plans were that the “springing cash” structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or “listed transaction,” penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren’t told that they had to file Form 8886, which discloses a listed transaction.

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.

Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

Another reason plaintiffs are going to court is that there are few alternatives – the penalties are not appeasable and must be paid before filing an administrative claim for a refund.

The suits allege misrepresentation, fraud and other consumer claims. “In street language, they lied,” said Peter Losavio, a plaintiffs’ attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs’ lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

“Insurance companies were aware this was dancing a tightrope,” said William Noll, a tax attorney in Malvern, Pa. “These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn’t any disclosure of the scrutiny to unwitting customers.”

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that “nobody can predict the future.”

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions – which in one of his cases amounted to 400,000 the first year – as well as the costs of handling the audit and filing amended tax returns.

Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but “criminal.” A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a “seven-figure” sum in penalties and fees paid to the IRS. A trial is expected in August.

But tax experts say the audits and penalties continue. “There’s a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens,” Wallach said.“Thousands of business owners are being hit with million-dollar-plus fines. … The audits are continuing and escalating. I just got four calls today,” he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

“From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount.”

Lance Wallach can be reached at: WallachInc@gmail.com

For more information, please visit www.taxadvisorexperts.org Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.com.

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com

National Society of Accountants Speaker of The Year

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Life insurance Litigation : About

Life insurance Litigation

Tweets about #lancewallach hashtag on Twitter

Retirement Plan Loans

Howard M. Phillips

The law allows participants in most retirement plans to access retirement savings via a tax-free loan. “Most” because some government plans, and all IRAs, do not allow for loans. Recent studies have shown that about 85% of plans that can allow for loans do so; and about 23% of participants in those plans use the provision.

Loan rules are contained in Section 72(p) of the Internal revenue Code:

Highlights:

1, Maximum Loan – lesser of 50% of vested account or $50,000 (with an additional limitation for multiple loans in the same year).

2. Maximum repayment period – 5 years level amortization (exceptions – longer periods allowed for home purchases).

A discussion of this area of retirement plan design must include the following:

1. Advantages of allowing the loans

2. Disadvantages of allowing the loans

3. Issues involved in initiating, processing and administering loans

4. Are loan repayments taxed twice?

5. Should loans be allowed in IRAs?

Advantages of allowing the loans

Formal studies in both the private and the public sector have demonstrated that the existence of a loan provision in a plan increases employee retirement savings, with employees citing the comfort they take in knowing their retirement funds are available in the case of an emergency. An October 1997 study of loan provisions and 401(k) plans, conducted by the Government Accountability Office, indicated that average annual contribution amounts are 35% higher in 401(k) plans with loan provisions compared with those without loan provisions. A 2004 LIMRA study confirmed that an increase does occur with availability of loans, albeit by only 21%.

Most plan participants, especially those who don’t have access to a home equity loan or a margin securities account loan, borrow through credit cards, which have significantly higher interest rates. Consolidating those debts through a loan from a retirement plan reduces the cost of borrowing and frees up funds to enhance savings.

A mid-2009 research paper published by the Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C., authored by Fed economists Geng Li and Paul A. Smith, concludes that there is significant positive value available from participant loans in retirement plans.

Here are some of those conclusions:

a. “…we find that many loan-eligible households carry relatively expensive consumer debt that could be more economically financed via 401(k) borrowing.”

b. “…we note that allowing households to repay 401(k) loans gradually even after separation from their employment could improve household welfare by reducing the risks of 401(k) borrowing.”

c. “…401(k) loans are not ‘double-taxed’, as is sometimes argued by analysts. The argument is that since 401(k) loan repayments are not deductible, they are double taxed when taxed upon withdrawal in retirement. But the appearance of double-taxation is a misperception.”

d. “The key way a household could gain by using a 401(k) loan is by shifting high-cost debt to relatively low-cost 401(k) loans. We focus on the potential gains from swapping 401(k) loans with credit card and auto debt, which are two common sources of higher- cost household debt.”

Economist Franco Modigliani, who won the 1985 Nobel Memorial Prize in Economic Sciences for his work in the field of retirement savings, explored the interplay between income, consumption, saving, and wealth through the life cycle. Modigliani pointed out that in order to maintain a stable utilization of monetary resources during life, people must borrow.

Modigliani once wrote:

One of the most valuable and attractive options that the 401(k) (type) program(s) has sanctioned is that of permitting plan sponsors to allow 401(k) and 403(b) participants to invest a portion of their capital in a temporary loan to themselves. This facility has the effect of increasing the liquidity of the capital accumulated in the account, making the accumulation much more affordable and attractive, especially for young people and people of more limited income, who tend to have little by way of reserves and therefore cannot afford to stash money away in a form where it becomes inaccessible for decades, no matter how great the need. In addition, the 401(k)/403(b) self-loans provide a source of credit that is not only available but also generally cheaper than available alternatives, especially for younger and poorer people.

Author’s Note: Loans are now also available in Section 457 retirement plans.

2. Disadvantages of allowing the loans

But there are disadvantages to making loans available out of retirement savings. Significant leakage from retirement savings accounts can occur when a plan participant terminates employment. If the participant has a loan in place at that date, he or she is compelled to repay the loan or suffer a burdensome tax. Other arguments against the practice include concerns that the participant will stop making contributions to the plan while his or her loan is in effect, that the participant will taxed twice since he or she is paying back the loan with after-tax dollars, and that more access to credit will necessarily mean greater debt for the plan participant.

Issues involved in initiating, processing and administering loans

a. Bureaucratic paper shuffling permeates the conventional arrangement. Each loan requires a separate loan application, a separate individually signed note, and a non-routine accounting transaction. In addition, repayment is left to the participant via an amortization schedule; or is assigned to a rigid payroll deduction.

b. Since loans are difficult, participants facing a need will borrow to meet the entire need at its outset.

c. Plan sponsors incur substantial expenses to administer the program. Fees account for part. Internal Staff resources account for much more.

d. Employment termination inevitably closes out the loan, causing retirement assets to leave the system – usually forever – to pay off the loan. Alternatively, the participant is compelled to pay tax on the voided loan at a time when he can least afford it.

e. Participants must expose their personal finances to clerks and supervisors with each borrowing.

f. Because loans are difficult and invade privacy, participants carry substantial credit card debt, paying 18%-26% at the same time they invest in conservative retirement plan investment options earning far less.

How can we remedy the leakage (loss) of retirement savings at termination of employment?

A terminating employee has these choices with respect to his retirement account:

1) Take the money; pay the tax and possible penalty; and consume it.

2) Directly rollover the money to an IRA, or a subsequent employer’s Plan.

3) Leave the money in the Plan, continuing that relationship as an inactive participant.

Here are the reasons why each of these alternatives has some negatives:

1) Once consumed, that retirement savings is most likely gone forever.

2) IRA rollovers may not have a better investment menu than that available in the x-employer’s program; emergency access to an IRA account (or availability to pay off high interest cost credit card debt) will involve tax and possible penalty; tax-free access via a loan is not available in an IRA; there may be no subsequent employer, or a subsequent employer plan; if there is a plan, that plan may not allow for loans, or may allow for severely restricted access via a loan.

3) If there is a loan, it has to be paid in full at that time. If funds are unavailable to do so, more borrowing, possibly at high interest cost, may be required to pay the tax and possible penalty.

A SOLUTION:

The record keeper adopts a system which encourages terminating participants to leave their account within the record keeper’s menu. This accomplishes the following:

a) There is no “leakage” from retirement savings.

b) The investment menu remains unchanged, including the availability of loans.

c) Existing loans need not be repaid at the time of termination.

d) The plan sponsor/staff experiences no additional work or cost to allow the plan to have inactive participants.

New user-friendly systems to initiate, process, and administer loans should remedy many of these problems. Among other things, new technology allows for monthly billing, easy access to loan information by Internet or telephone, summary loan information on a participant’s quarterly statement through a link with the plan vendor, expanded loan repayment options, flexibility in repayment amounts above the minimum required by the Internal Revenue Service, and greater flexibility in handling leaves of absence, defaults, and repayment after termination of employment.

The focus of these new systems is monthly billing for repayments. An automated, monthly billing system allows for loans to be granted without detailing a specific reason, and it extricates the plan sponsor and the third-party administrator from the loan initiation process and from setting up repayment after termination of employment (no setup is needed because monthly billing continues). And enhancing the monthly billing system with loan initiation via a bank card brings additional positive value, especially where the participant needs access to funds in an emergency or in situations in which a balance transfer will immediately substitute a very high bank-card borrowing cost for a significantly reduced borrowing cost (freeing up funds for additional retirement savings).

New technology also enables plan record keepers, plan sponsors, and third-party administrators to fine-tune the ways in which they provide those loans. By allowing loans without explanation, permitting loans to be initiated with a bankcard, and limiting loans to a selected amount no greater than $10,000, the plan a\sponsor can extricate itself from involvement in loan procedures. This would be especially meaningful for non-ERISA 403(b) plan sponsors that don’t want their employer involvement in providing loans from the plan to kick the plan into being an ERISA 403(b) plan. It will also maintain privacy for the participant and give the plan’s third-party administrator only one job – that of initially determining if the line of credit that is requested by a participant is within the limits of the plan’s loan procedures.

4. Are loan repayments taxed twice?

Loan proceeds that are repaid are later distributed from a qualified retirement plan and are taxed once. The loan is a tax-free transfer, and when the loan principal is repaid, ignoring investment growth, the transaction puts the retirement account in the same position it would have been had there been no loan. If we trace cash flow, we will find that the financial transaction accommodated by the loan is fulfilled with pre-tax dollars. Some future after-tax money is used to pay back the loan interest, and ultimately is taxed again. However, the net result of all of the flow out of the plan is a single tax on the amount of the loan principal in the distribution (when the plan account is distributed, the participant receives a double-taxed distribution but already owns a never-to-be-taxed financial transaction, the algebraic net of which is a single tax).

5. Should loans be allowed in IRAs?

The key reason to consider loans in IRAs is the current initiative to require that employers (with a very small employer exception) provide for a payroll deduct IRA for employees where that employer does not sponsor another retirement plan. Since the initiative includes the provision that an employee can decline participation, allowing for a loan will give all employees the comfort in knowing they have access to a tax-free loan should such a pre-retirement need occur. Several noteworthy studies have shown that plans allowing for loans have significantly greater retirement savings participation and contribution amounts than plans that do not allow for loans.

Section 72(p) and its regulations should become applicable to all non-Roth IRAs (traditional TRAs, payroll deduct IRAs, rollover IRAs, SEP-IRAs). One consideration for this applicability could be a modification in the $50,000 limit in Section 72(p). Perhaps that limit should be reduced for non-rollover IRAs to $15,000 (bearing a similar relationship to the $50,000 limit as does the contribution limit-IRA vs. 401(k)).

The burden of loan initiation, processing and administration will not be placed upon employers, or IRA custodians. This is so because there are available today fully automated systems for loan initiation, processing and administration of Section 72(p) loans.

Those involved in bringing payroll deduct IRAs to Congress for legislation enactment are urged to consider this modification in the proposed bill so as to lessen significantly the number of employees who will reject participation, and will allow other IRA holders to have an access to funds in an emergency, such that that retirement account will be restored by repayments (rather than having to withdraw, suffer the tax, without repayment, in order to handle the financial need).

Finally, a note for positive public policy. An IRA owner who is paying very high interest costs for credit card debt would be allowed to transfer that debt (within limits) to an IRA loan, paying himself the prime interest rate, plus a small administrative fee. This debt service reduction will free up funds to increase retirement savings.

The advantages of loan availability in retirement plans significantly outweigh the disadvantages. However, these advantages disappear unless the loan initiation, processing and administration is simplified. All current loan systems should take this quiz:

If one or more of these questions is answered “NO,” then a contemporary loan system will be an improvement to the loan system now in place: Does the current loan system do the following:

1. Allow for immediate balance transfer from high interest cost credit card debt to a loan where interest at prime (today 3.25%) is paid to the participant’s account? Even with the loan administrative fee, the 18%-26% credit card interest cost is replaced with about 6%; thereby increasing personal disposable income, increasing retirement savings, or both.

2. Allow for a line of credit to be held in a Loan Fund earning higher yields than plan investments held in a money market (Loan Fund today-2.5% vs. money market rates of .25% or less)? Therefore, an unused line of credit earns 2.5% at today’s rates; a used line of credit earns 3.25% at today’s rates.

3. Allow for participant privacy in applying for a loan? If a reason is needed for the loan, then the participant must reveal his financial duress to his employer, and the employer must take the time to determine if the reason is valid (or violate the plan’s terms). Loans do not require a reason (since the law does not require it).

4. Provide for immediate access to funds in the account in an emergency?

5. Remove the employer and the TPA from adjusting loan repayments for leaves of absence (different for military vs. non-military leaves)? — and from the handling of defaults?

6. Provide loan information to the participant 24/7?

7. Give the participant a loan calculator to assist the participant deliberating a loan?

8. Allow the participant to set up one line of credit, with a single one-time application, so that that line of credit may be used in smaller pieces than having to apply once for a larger loan so as to avoid the hassle of applying for smaller loans as they are needed?

Allow for variable payments above the minimum required, including a full payoff?

10. Allow the participant to continue repayment after termination of employment, without the

creation of and handling of coupon books by the employer or the record keeper or the

TPA? Such a continuation of repayments avoids the participant’s having to find the

money to repay the loan, or pay the tax and possible penalty if the loan cannot be repaid.

Borrowing is a fact of life. A limited loan from one’s retirement account offers an inexpensive way to handle borrowing needs. Millions of retirement plan participants have utilized their plan’s loan provision. New technology now available to initiate, process and administer these loans has enhanced its advantages.

HOWARD M. PHILLIPS is a fellow of the Society of Actuaries and the Conference of Consulting Actuaries, a member of the American Academy of Actuaries and is a past president of the American Society of Pension Professionals and Actuaries, and an enrolled actuary. He is an independent consulting actuary with offices in Fairfield, NJ, and Delray Beach, FL.

419 and 412i Plan Help

Lance Wallach's wisdom is sought after by many news outlets.

Comments for Lance’s review of Protecting Clients from Fraud, Incompetence and Scams

Google - Bookmarks

Guaranteed Ways to Grow Your Business

CJA & Associates and 412i, 419, and Other Abusive Plans | Lance Wallach

Call for Tax Resolution, IRS Audit Defense, Expert Witness Lance Wallach