LISTED TRANSACTIONS UPDATE AND REFRESHER IN CONTEXT OF LOCALLY
PROMOTED 412(i) PLANS AND 419A(f)(6) OR 419(e) PLANS
Initial Comments:
The presenter has two+ situations where the IRS has identified potential “Listed
Transactions”. The audits were over six months ago on both - and guess what? No
assessment yet. “Listed Transactions” can produce frightful penalty exposure. As
commented below, the IRS has no statutory authority to waive Listed Transactions
Penalties. Are IRS Audit Agents “burying” their findings to prevent assessments (most
IRS personnel I know believe the penalties are too draconian)? Your guess is as good
as mine.
Setting the Stage
Local insurance agents and Pension/Benefit Consultants are or were (and if it is
past tense there is fallout at the current time) promoting use of three types of benefit
programs for which virtually no one in this room should allow their clients to enter into
(assuming you have some control over it). And if you or your clients do enter into such a
benefit program - you need to exercise extreme caution to protect both yourself and
your client. The notorious three are:
1. IRC § 412(i) fully insured Defined Benefit Plan with excess life
insurance death benefit coverage. This is, and has been, potentially a “listed
transaction” (described later) since spring 2004 (Notice 2004-20). A 412(i) Plan is a
“listed transaction” for a given tax year if the face value of the life insurance death
benefit on the life of a participant paid under the Plan’s terms to the Plan is more than
$100,000 in excess of the maximum allowable death benefit for the Defined Benefit
Pension Plan participant - and a deduction is taken for a contribution to the Plan for that
year. If the policy face value exceeds the allowable death benefit, but is under the terms
of the Plan payable to the participant, the Plan is not qualified under the Internal
Revenue Code, but the literal wording of the IRS Listed Transaction Notice is not met.
Is it a Listed Transaction? Some IRS personnel say yes but that might be worth
litigating. Other problems include:
• Life insurance exceeding 50% of Plan assets (disqualifying
feature) -these Plans must provide proper annuity policy coverage.
• Benefits provided under the annuity policy not equaling the
benefits provided under the Plan document.
• Cash value life insurance benefits for owners - and term or
“discriminatory” life insurance coverage for non-owners.
• Failure to cover sufficient personnel to pass coverage tests. {00147201.DOC}3
• Failure to implement annuity insurance benefit coverage during the
Plan Year (the IRS position is the policy must be purchased during
the applicable taxable year - no 81/2 month grace period to
purchase policy even if the tax return is on extension (the full
premium can be paid up until the return due date assuming the
policy was in force as of the end of the tax year).
Note - This discussion will focus primarily on “listed transaction” issues.
2. IRC § 419A(f)(6) Welfare Plans. This is a type of “pooled” VEBA
that is allegedly maintained by multiple employers. No one employer can contribute
more than 10% of the total contributions. And the Plan will not qualify for any favorable
tax deduction treatment if the Plan has “experience rated” arrangements under which
each employer’s contributions and benefits are individually determined either on the
contribution end or the benefit end - or both. A purported 419A(f)(6) Program that
maintains experience rating for employers has been a “listed transaction” since Notice
2002-15. Other problems include:
• Contributions in excess of amounts deemed actuarially necessary
to provide the cost of the death benefit (under “term coverage
principles”).
• Severance or disability benefit features that are in effect, intended
to operate as “non-qualified deferral compensation plans”.
Deferred Compensation is NOT a permissible 419A(f)(6) benefit.
And the Plan almost certainly can be deemed to violate IRC § 409A
(a topic of its own).
• The Insurance Policies are almost always horrible economically: No
one would buy them outside the context of a claimed big tax
deduction.
• Funds are held by a third party trustee - out of client’s control.
Think about the implications of that.
3. 419(e) Welfare Plan. This is a single employer VEBA. Heavily
promoted by insurance agents in recent years/months, deductions to this type of Plan
were specifically limited in the Tax Reform Act of 1984 (see discussion in another
portion of the presentation). The net import of these limits “killed” the single employer
VEBA tax shelter market and led to the (largely abusive) 419A(f)(6) programs. IRC §
419(e)’s limits basically limit deductions to amounts the employer could otherwise
deduct without the VEBA, with some minor exceptions. Post retirement medical and life
insurance benefits cannot be funded to exte
No comments:
Post a Comment