Abuse of 412(i) Plans

On February 13, 2004, Pam Olson, Assistant Secretary for Tax Policy at the Department of Treasury, was quoted during the release of Revenue Rulings addressing 412(i) plans as saying: “The guidance targets specific abuses occurring with section 412(i) plans,” stated Assistant Secretary for Tax Policy Pam Olson. “There are many legitimate section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”

Does your 412(i) plan have one or more of the following?

  1. Different type of life policy on the principal(s) than on the rank-and-file?
  2. Life insurance on the principal(s) and none on the rank-and-file?
  3. A mix of policies from different carriers?
  4. “Excess” life insurance? In other words, an amount of life insurance coverage on participant(s) that exceeds the allowable payout under Revenue Ruling 74-307 or Revenue Ruling 2004-20?
  5. Term Life Insurance?
  6. Universal Life Insurance?
  7. Does your plan exclude more than 30% of the Non-highly Compensated Employees yet include all of the Highly Compensated Employees?
  8. If you have employees who meet the age and service eligibility requirements, does your plan cover at least the greater of 2 participants or 40% of those employees?

If you answered “YES” to one or more of the above, your plan may be subject to IRS penalties or disqualification. You may even be subject to the Listed Transaction rules! Listed Transaction can be as high as $200,000 under the American Jobs Creation Act of 2004? There is no provision for the fine to be waived?



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