412i & 419 I need help

[Guest SaulAlbom]

Hey everyone I have some basic questions regarding the 412i and 419 af 6 plans.

412i

1. Make up of 412i plans can be: 100% whole life or 50% annuity and 50% whole life insurance? Can they be like 30%/70% or another combination?

2. what is the maximum yearly (monthly) benefit for a DB plan and for a 412i

3. what constitutes eligible employees 20ys old and worked for how long?

4. Must 100% of eligible employees be covered? Someone told me that you can get away with 40% covered i.e. if there was a husband and wife and three employees then just the husband and wife can be covered and nothing for employees(100% benefit for owners)

5. the structure of the annuity in the 412i Assumptions, i=3%, term is 5years and contribution is 150k per year to annuity

Say 150k flows into the annuity portion of the 412i in year one and assume a crediting of 3% Then at the end of year one the value of the annuity would be 154.5k minus surrender charges if they apply. At the end of five years then the annuity value would be 750k plus all the interest earned? If one wants to pentionize will that be a life or 20 year certain? If one wants to sell it for cash value then roll it into an ira how does that work? Is it converted to cash for its same value? Is it a 1035? What are the tax implications when reciving the dissbersments, its treated like income?

4 the whole life portion of the 412i

How does one figure the death benefit? Each cash value is different depending on the insurance company right? Loans can not be taken from the cash value, without taxation? If the owner dies during the term of the 412i plan does it pay to the estate or beneficiaries? Is the DB taxable as ordinary income because its qualified? At the end of the term (assuming 5 years) does one keep the whole life policy in force? If the owner keeps the policy in force does he keep paying the premiums and does that count as a taxable distribution (taking control of policy) If owner does not want to continue the whole life then how is it liquidated and what is the tax implications? Is that value rolled over with the annuity’s value into an IRA?Is one taxed on the gain (money put in minus gains?)

The 419s

Has anyone ever used Disability in a 419?

How do the debit cards work with the cash value of the 419

How do you get accesses to the cash value, with qualified expenses? Does this include drugs, hospital bills, LTC needs… what about health insurance? Someone told me that if a doctor recommends you to build a pool for health reasons then you can start taking loans from the Cash value. Are these loans tax free so long as the policy does not collapse?

Is it truly unlimited contribution limited by reasonable compensation and the underwriting of the insurance company?

Can you put long term care in these things?

Anyone have the phone number of people who build these?

Is it true you can build near complete discrimination between classes?

What are considered classes and what are not?

Thank you guys sooo much!

Feel free to call if you like

Saul

972.733.9987

saul@albominvestments.com

[Guest SaulAlbom]

Thanks agian everyone, in advance. I want to know what is going on. Its a little hard for us "sales guys" to find the info we need on this stuff. Anyone know of a good book or two?

Thank you

Saul

[GBurns]

Based on your questions I suggest that you refrain from promoting any of these or related concepts until you have further researched the issues.

Maybe you might want to start with a search of this Board for previous threads then a search on Google (using filter words such as disallowed, abusive etc). Additionally you might want to ask some of the larger insurance companies why they do not support either the plan designs that you illustrated or the concepts in general. Although every company cannot and will not all sell everything or the same thing, there has to be valid reasons why most will not touch these concepts especially what you illustrated. They will tell the reason why since most have published at some time an agent warning or newsletter on the subject.

Both 412i and 419 have been around for a long time and there are many different sales concepts based on them. 419 concepts, in particular have been the object of a number of lawsuits. Many promoters are claiming to have plans that comply with the results of those lawsuits, but that remains subject to questioning.

I think that in the last few months the IRS also issued some new rules with which I doubt that most can comply with. There are also the new 409A rules which might have an impact. So it is possible that a concept that was valid a few months ago might no longer be so.

Do not base the legitimacy of any concept solely on the say so of any promoter of any concept. Take their explanation and have its legitimacy evaluated independently by a competent experienced person.

[mwyatt]

I would start your research first with the American Jobs Creation Act of 2004, specifically the sections dealing with abusive tax shelters, before spending too much of your time boning up on 412i and 419/419a plans especially.

Note the penalties imposed on "material advisors" who don't have their clients/marks declare on their tax return that they are participating in an abusive tax shelter. $100,000 is what I call a fairly stiff penalty.

Latham & Watkins Summary

[Blinky the 3-eyed Fish]

Based on your questions I suggest that you refrain from promoting any of these or related concepts until you have further researched the issues.

I completely agree. It is not possible to answer the questions you are asking because of the many details of underlying concepts that must be considered.

[Guest smhjr]

Well I can at least take a stab at answering some of the questions. Let me warn you though that most of this is fact and some of it is opinion. I am a dork and sit around occasionally with some of my colleagues over a few beers and just argue and discuss some of this stuff. Others would likely disagree with some of the conclusions I have come to and I am not sure if there is any guidance I could point you to on all of this.

1) Theoretically a plan could be made up of 100% insurance, but if that happens there is going to be a potentially large amount of the contribution that is not deductible and would be subject to a 10% excise tax. The excise tax would be paid every year the nondeductible contribution remains in the plan (I think). If you are going to put insurance in a plan regardless if it is a 412(i) or any other defined benefit plan odds are you should stick with a company that will comply with the incidental death benefit rules. You can look up revenue ruling 74-307 to get an idea of what incidental limits are. You probably will want to read revenue ruling 2004-20.

2) $13,750 a month in 2004. I'm pretty sure the amount increases in 2005 but I don't have the chart in front of me.

3) Eligible employees are typically 21 years old and have worked for the company for 12 months. A plan can have younger employees or less service required if designed that way. Also you could require employees to work 24 months before becoming eligible but if you do that they are 100% vested. Vesting refers to a requirement that employees work a certian number of years to actually receive their "vested percentage" if they quit or are fired.

4) There are discrimination tests that must be passed. The 40% rule that you are refering to comes from 401(a)(26). Any defined benefit plan sponsored by an employer must cover the greater of 40% of it's eligible employees or two employees. In other words if there are only 2 employees you can not just cover one in the DB plan. If there are 5 employees you must cover 40% which = 2. You still won't pass discrimination testing if the only employees receiving a contribution are the owners.

5) Is a tough question. There are a lot of questions in there and I am not sure I follow all of them. They all seem to be insurance questions and not pension questions. Yes the annuity would be $750,000 plus interest earned. "Pentionize" as you called it is actually called annuitize I believe. That value would be based on the insurance companies settlement options at that time. You would have to contact the insurance company to receive an illustration. You could surrender the annuity and roll it over to an IRA for the lump sum that the insurance company would give you. And yes, all distributions from a pension plan are taxable. On top of that if the person is less than 59 1/2 they would be subject to an additional 10% penalty tax. There are ways of avoiding the penalty tax if the amount received is a series of substantially equal payments, i.e. an annuity payment. I do not know the details on that though.

6) Again an other compliacted series of questions. The death beneift should be figured using one of the methods in 74-307 I mentioned earlier. Yes, cash values are dependent on the different insurance companies. I don't think loans can be taken from a 412(i) plan at all, but I am not 100% sure on that. Any participant with life insurance in a defined benefit plan will receive a 1099 each year to pay taxes of what is called PS-58 costs. This is the current economic benefit of the life insurance coverage. If a person dies while there is a policy in a pension plan that amount will not be taxable because they have been paying the PS-58 costs (taxes). Although I suppose if there is more death benefit in the plan than the incidental limits, that amount would not be paid to the beneficiary at all and would be stuck in the plan. I don't think the plan would qualify under 412(i) anymore because you would likely have a large influx of cash and nowhere to put it. At that point you have a mess on your hands (assuming it is the owner that died). At worst you have a reversion that will take place in which most of the excess money ends up at the IRS and at best the company is slightly more attractive to sell to someone else that has an under funded pension plan.

[Blinky the 3-eyed Fish]

Smhjr, no offense, but your explanations, while semi-correct still lack many important details. In fact, your statement that "theoretically a plan could be made up of 100% insurance" could incite a listed transaction if that advice was followed. I mean theoretically you could shoot someone and steal their car, but you wouldn't because of the consequences. The devil is in the details, especially with 412(i) and 419.

[Guest SaulAlbom]

Smhjr

Hey thanks for the very long post. As a RIA wholesalers come to me all the time and its hard to know who is right (just like reading on the net and). I try to read the tax code but it only takes me so far. I want to understand, perfectly, everything I recommend for my clients. I won’t recommend any of these until i know them in and out. In this case I was trying to set up a meeting with accountants to teach them about 412is and 419s it but I cant get a straight answer out of anyone exactly how 412is or 419s work nor can I find an authoritative document other then the IRS codes. And now I understand that the whole story isn't written there either. I guess they think if i know how it works I won't sell their product.

thanks for your help guys it has made some things clearer

saul-guess i need to bone up on codes....

[GBurns]

As important as reading the Code, and just as important the Tres Regs, are, it is the application of the codes and Regs that will get you. Even if you learn the code and Regs you still have to learn the particular plan concepts.

It also should take you quite some time to be adept enough to want to try and teach others about these plans. Not only do you have to know enough about the code and Regs, you also have to know the intricacies of each plan design and its legal basis and support. Usually you learn before you start planning to use the item.

A suggestion for the future is not to allow the sales rep to waste your time trying to explain that which he probably still is trying to understand himself, but make him provide the technical specifications etc and give you access to his legal or technical support. That is where you are supposed to get definitive answers and not from a sales pitch.

If the technical support cannot provide satisfaction, then you walk away.

[Guest smhjr]

Hey I'll take semi-correct, it sounds better than semi-wrong

I don't think anyone knows all the details including the IRS. 2004-20 is the ruling that refers to the listed transaction aspect of it, but that ruling specifically states that you can do it, right? I wouldn't reccomend it and I wouldn't want to administer it, but that's why I referred him to that ruling. I think a client should receive legal advice if they are seriously considering it and then decide if the attorney is giving sound advice or just want to collect the retainer when it goes to court.

Saul, I think it boils down to the fact that no one knows all of the details. Until a 100% insurance plan is litigated I think it will stay that way.

[Blinky the 3-eyed Fish]

100% life insurance would definitely violate RR 74-307. While I doubt it, I suppose it would be possible to stay within the 100x rule if the person was very young and you found the right insurance product. Again, I doubt it.

I don't think anyone knows all the details including the IRS. 2004-20 is the ruling that refers to the listed transaction aspect of it, but that ruling specifically states that you can do it, right?

I think the details on this are clear. RR 2004-20 describes the listed transactions, but the incidental rules are in other promulgations. You still can't violate them.

[Guest SaulAlbom]

Any of you guys work with 419s?

S

[GBurns]

Work with 419 etc plans is vague.

Do you mean work as in promoting them or as in getting people out of them or as in warning against certain plan designs or What?

Are you seeking help with such plans? What sort of help? Most of all since 419 is just an IRC section, it means that you are most likely interested in some promoter's particular plan design or sales concept which would be a very different issue.

There are readers and posters who understand the issues surrounding many 419 plan design concepts, but who might not understand the particular 419 plan design/concept that you might be seeking help with or have an interest in. So it might get you better responses if you give more details of the particular issue or concept involved.

[Ron Snyder]

I work regularly with welfare benefit plans. However, the term "419 plan" usually applies to plans seeking to be exempt from the deduction limitations imposed by IRC sections 419 & 419A by complying with 419A(f)(5) (collectively bargained plans) and 419A(f)(6) (10-or-more employer plans). It is my impression that most of the 419A(f)(5) and (6) plans are promoted through errors, misstatements and outright lies. I can provide you with lots of information, including Chapter 39 of the Life Insurance Answer Book which I co-wrote.

Our welfare benefit plans that offer disability insurance comply with the HRA regulations. "Access" to the funds is similar to access to funds in a 125 plan: medical claims are submitted and are paid or reimbursed. This can be done with a medical debit or credit card.

Medical expenses include all 213(d) medical expenses, including LTC premium and out of pocket medical expenses.

Your post implies that the the entire trust fund is invested into a life insurance cash value. This is not the case with our plans; the medical amounts are held and invested separately from the life insurance benefits.

I have never paid a claim for a swimming pool, although if it were a medical necessity it is theoritically possible. Don't count on it.

Contributions are not unlimited to any welfare benefit plan. If a plan falls under 419A(f)(5) or (6), it is exempt from IRC Sections 419 and 419A but is still subject to the limitations in effect in 1983. [Note: 419 and 419A were largely a codification of the law at the time.]

It is not possible to "build near complete discrimination between classes"? That is one of the misrepresentations or lies I referred to above. Under IRC 414(t) all employees of all entities have to be considered for nondiscrimination testing. That includes the nondiscrimination requirements of IRC sections 79, 105 and 505.

If you desire more information, email me off board.

[GBurns]

If he emails you off Board then he would not have the benefits of rebuttals, counter arguments or anything else that might alert him to any incorrect statements that you might make or clarifications that might be needed.

For example you posted :

"Our welfare benefit plans that offer disability insurance comply with the HRA regulations"

What does disability insurance have to do with HRAs?

While I think that this is a typo, it might very well be what you referred to as "errors, misstatements and outright lies". How is anyone to know if you go off Board? Or is there a good reason for secrecy such as protection of intellectual property?

[Ron Snyder]

Disability premiums (along with life insurance premiums and long-term care premiums) are permitted benefits under HRAs.

I don't believe in using the board as a place to sell oneself or one's services. If anyone wishes to discuss a potentially representation, it is more appropriate off board rather than on. In his initial post, smhjr indicated that he wished to discuss these matters. I simply gave him an opportunity.

I am an ERISA attorney and an enrolled actuary. In each capacity I am bound by a code of ethics with respect to consulting services that I may provide to others.

Our welfare benefit plans have been reviewed and approved by the legal departments of several governmental entities and insurance companies. Rather than protect "intellectual property" I have published many articles in national publications, including the Life Insurance Answer Book.