Injurious Reliance - Company misrepresented retirement plan benefits

[Guest tompaul]

Company establishes non qualifed deferred compensation plan for independent contractors which company refers to as a "retirement plan". Company "markets" the plan to contractors by touting its tax benefits and mistakenly represents that post-retirement distributions from the plan are reportable on 1099R and therefore exempt from SEPA taxation. Contractor participates in plan for several years and retires with expectations of using plan assets to fund retirement. Subsequent to contractor's retirement but before beginning distributions, the company's accountants/auditors review plan's features and determine that distributions should be reported on 1099 misc, and therefore are subject to SEPA taxation upon distribution. Contractor is harmed to the extent that contractor paid maximum SEPA taxes in the years in which income was deferred - and is therefore being subjected to payment of additional SEPA taxes which would have been avoided had the contractor opted not to participate in the plan. Company admits mistake but denies contractor's claim for compensation.

Question: Does contractor have a case against company for misrepresenting the ultimate tax benefits of the "retirement plan"? Perhaps on grounds of "injurious reliance"?

[Guest b2kates]

May have no damages. just because it is on 1099Misc does not mean that it is currently subject to SEPA. rule of when includable for SEPA purposes has changed over the years and since indiviidual has stated that in earlier years exceeded the maximum limits there may be a position to take that the current distribution is not subject to taxation.

[GBurns]

I guess it will depend on the details and what is in the fine print. Maybe recourse might be against the promoter rather than the company, and it is not clear which is which. Who were these contractors ICs to?

[Guest tompaul]

Sorry if this is poor etiquette, but here is link to discussion regarding the queston of whether distributions will be subjected to SEPA taxes. The posters believe that it will be subject to SEPA.

http://benefitslink.com/boards/index.php?showtopic=27600

[mbozek]

Since the plan is not subject to ERISA you will have to review the applicable state law to determine if such a claim can be made. What will your claim for damages be if the investment income from the deferred amounts was not taxed until paid?

[Guest tompaul]

Good question. In this instance, contractor wants to have his cake and eat it too.

Clearly, the contractor has benefitted from having deferred the income (to the extent that he has lowered his average income tax rate and deferred taxes on investment income), yet this benefit will be partially/mostly/totally offset when he is forced to pay extra SEPA taxes. Many assumptions need to be made to determine how the tax benefits net out against the additional taxes (not the least of which are assumptions about the future wage base which is subject to social security taxes).

In another context, contractor could (theretically) claim that he is damaged because he chose to be an agent of the company (thereby avoiding more lucrative employment opportunities) mainly because he was enticed by the attractiveness of the company's retirement plan (and the enticing aspects of the plan ultimately dissipated). Reaching a bit?

[mbozek]

The IC could be considered to have made an investment decision to invest the defer the comp in return for paying taxes on the distribution. I dont see any claim for loss for the SECA taxes and wouldnt take this case on a contingency.

[Guest tompaul]

Thanks. The insurance company involved has stirred up a real hornets nest with their negligence. They have hundreds of retired agents who participated in this plan and now find themselves in the position where they have been receiving distributions under the plan (for several years) and have not paid SEPA taxes on the distributions. The agents did not pay the SEPA taxes because the insurance company had informed them initially that the plan was structured whereby the distributions would not be subject to SEPA (which would have been the proper ruling if the agents were employees, but is improper for agents which are treated as independent contractors). Now, suddenly, the insurance company notifies the agents that the initial representations were erroneious - the distributions will now be reported on 1099 misc rather than 1099 R - and the agents (to comply with tax laws) must ammend past tax returns and pay SEPA taxes on past and future distributions.

As you can probably imagine that the agents believe they have been damaged by the fact that the insurance company misrepresented (negligently) the tax implications of participating in the plan. The sheer size of the class (large number of agents) probably means that this case goes forward in some respect.

[Guest Harry O]

I wouldn't amend past returns unless the insurance company re-issues 1099s for those years.

You might be able to get some $ from the insurance company if you can form of class of agents that threaten to sue. Although I agree that you have an uphill battle for a monetary recovery, the insurance company may be willing to kick in a few dollars to avoid the hassle of a potential class action.

P.S. I think your chances are enhanced since you will be out from under ERISA which would generally preclude these types of damages. State law contract claims are actually a better avenue for you and would likely permit recovery if a breach of contract can be demonstrated.

[GBurns]

tompaul

I still do not understand who promoted and who sponsored the plan etc? Who made the initial assurances, the promoter, the plan sponsor or the enrollers?

[mbozek]

I dont see what claims the agents have prior years if there is no change in tax reporting for past years and/or the S/l for back taxes (generally 3 yrs) has expired because they will not have any damages for the incorrect reporting. I dont think the agents have a responsibility to report the payments as SECA income if the payor does not issue a revised 1099 for such years. The only issue is whether there is liability of the payor for years after reclassification of the payments.