Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes while increasing their own retirement savings. The solutions have ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS Section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, almost all the plans were noncompliant, even though insurance companies vetted them and encouraged their agents to sell them. This fostered an environment that led to numerous IRS crackdowns, disallowed tax deductions, and clients suing their insurance agents and others.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans. Many insurance agents sell these plans. The tax consequences are enormous for unknowing clients. The liability may be equally extreme for their insurance advisors. The insurance agent may be called a “material advisor” if the insurance professional sells one of these plans, if the client takes a tax deduction, and if the IRS considers the plan an abusive, listed transaction or substantially similar to such a transaction.