412i plan mess
CPA contacted me with this case. Her client’s husband closed a 412i pension plan many years ago. He also dissolved his corporation. He became the owner on the life insurance policy from the 412i plan (previous was the pension plan; which was also the beneficiary). CPA doesn’t know if proper income reporting was done when ownership changed. Beneficiary form was never updated; husband died the end of 2010. The wife was advised to rollover the $1 million insurance proceeds to an IRA annuity in Jan. 2011, which she did. The concerns now are that it seems the insurance payout was no longer qualified money eligible to be rolled over, and if the closed pension plan was the only beneficiary, who is entitled to the proceeds? My thought is that it’s guided by the insurance company’s default beneficiary provisions? Although we are in CA, community property state.What kind of professional can help her out of this mess? The CPA has referred her to an ERISA attorney, who will be very costly. I would love to help her find the best resources to use since I am a financial planner and cannot give legal or tax advice.
Permalink Submitted by Peter Lingane on Wed, 2011-11-23 15:36
A 412(i) plan is a type of defined benefit plan funded with life insurance. At some point, the participant buys the insurance from the plan and rolls the sales price over to an IRA. You need an ERISA attorney because, in addition to all of the other problems that you have uncovered, it is not uncommon for there to be too much insurance in the plan and/or for the purchase price to be too low. See IRS Revenue Ruling 2004-20.
Permalink Submitted by Lee Martinson on Wed, 2011-11-23 17:46
Might it also be possible that there are potential “listed transaction” problems here? If so and form 8886 was not filed there might be 6707A Penalties. If they were supposed to file form 8886 and didn’t I believe there is no statute of limitations. If so, whoever they talk to better be familiar with these issues.
Lee
Permalink Submitted by Peter Lingane on Thu, 2011-11-24 00:09
There are legitimate 412(i) plans. A task for the ERISA attorney would be to confirm that this particular plan was legitimate.
As an indication of how seriously the IRS takes abusive plans, consider the severe terms (Announcement 2005-80) that the Service set out six years ago for those who came forward voluntarily and admitted to an abusive plan.
• All deductions for open years for contributions to the plan would be disallowed.
• The plan would have to distribute the insurance contracts to plan participants and would have to terminate.
• Any distributions must be included in participants’ income at fair market value, with contracts valued at the sum of premiums paid rather than at the more usual, and lower, estimates of value.
• At the time of the distribution, the employer would be permitted to deduct the lesser of the amount of the contributions for which deductions were previously disallowed or the amount included in income by the participant upon the distribution of the contract.
• The distribution would be treated as a distribution from a nonqualified plan for purposes of §§72 and 402. Thus participants could not roll over distributions to an eligible retirement plan such as an IRA.
• An employer could resolve the transaction under this settlement initiative only if participants also entered into closing agreements.
• Any person unable to fully pay all tax, interest, and penalties would have to make payment arrangements acceptable to the Service prior to execution of the closing agreement.