IRS 412(i) Audit Initiative: Are All the Plans Bad? The ERISA Audit Report
Defined benefit pension plans funded with annuities and life insurance have been around for a long time. Given an exemption from the normal pension funding rules by Internal Revenue Code section 412(i) (now section 412(e) after the Pension Protection Act), nobody paid them much attention until the late 1990s and early 2000s. Then insurance agents started to market them heavily, and the IRS began to pay attention. In early 2004, it issued several Revenue Rulings and proposed regulations intended to curb what the IRS viewed as “abuses” – that is, plans that did not, in the IRS view, meet the 5 or 6 key requirements for 412(i) plans under the Code – and not long thereafter it started a sweeping audit initiative to eliminate abusive 412(i) plans.
The IRS is currently processing hundreds of these audits. The vast majority of the cases have not been resolved.
It will come as no shock to the benefits community if we say that a number of the plans under audit fail to meet all of the rules under section 412(i). At the same time, it is also fair to say that many of the rules that the IRS is now seeking to enforce weren’t clear when the plans were set up. But what may come as a surprise is that there are many plans that do meet the requirements. Unfortunately, under the audit initiative, these plans are being lumped together with the non-compliant and abusive ones, and the taxpayers are being forced to spend significant sums defending their retirement funds.
IRS 412(i) Audit Initiative: Are All the Plans Bad?
ReplyDeleteThe ERISA Audit Report
Defined benefit pension plans funded with annuities and life insurance have been around for a long time. Given an exemption from the normal pension funding rules by Internal Revenue Code section 412(i) (now section 412(e) after the Pension Protection Act), nobody paid them much attention until the late 1990s and early 2000s. Then insurance agents started to market them heavily, and the IRS began to pay attention. In early 2004, it issued several Revenue Rulings and proposed regulations intended to curb what the IRS viewed as “abuses” – that is, plans that did not, in the IRS view, meet the 5 or 6 key requirements for 412(i) plans under the Code – and not long thereafter it started a sweeping audit initiative to eliminate abusive 412(i) plans.
The IRS is currently processing hundreds of these audits. The vast majority of the cases have not been resolved.
It will come as no shock to the benefits community if we say that a number of the plans under audit fail to meet all of the rules under section 412(i). At the same time, it is also fair to say that many of the rules that the IRS is now seeking to enforce weren’t clear when the plans were set up. But what may come as a surprise is that there are many plans that do meet the requirements. Unfortunately, under the audit initiative, these plans are being lumped together with the non-compliant and abusive ones, and the taxpayers are being forced to spend significant sums defending their retirement funds.