IRS Auditing 412(i) Plans

The Internal Revenue Service has 
recently been auditing 412(i) 
defined-benefit pension plans.
They are seeking substantial taxes and 
penalties from what they characterize as 
“abusive plans,” but they do not regard all 412
(i) plans as necessarily abusive.  A properly 
structured and administered 412(i) plan can 
be an invaluable tax reduction tool for a 
business, but care must be taken.

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  1. commission) say most of their industry counterparts collect a hefty commission from the sponsoring insurance company - up to 80 percent of the value of your first year's premiums. According to estimates, that's about 25 times more than the financial advisor typically receives for selling mutual funds.
    (The money is paid by the insurance company - it doesn't come out of your pocket.)
    In defense of the practice, Mark Mackey, president and chief executive of the National Association for Variable Annuities, said the commissions are based on the work involved.
    Commissions on sales of variable life insurance products are higher because they are a complicated investment tool to design. Each one is tailor made for the client.
    "There's nothing inherently wrong with working on commission," Mackey said. " It's a very complicated financial product. You have to make a lot of determinations including what level of death benefit is appropriate and what type of benefit the client needs. You also have to decide whether the client needs a product that will enable them to take out money for loans in retirement. Variable life insurance policies can serve a lot of functions."
    Moreover, he noted financial advisors and insurance agents are governed by strict regulatory guidelines, issued by the Securities and Exchange Commission.
    "These policies can only be recommended if it's in the best interest, or most appropriate, for the client," Mackey said, noting the vast major of the industry adheres to these principals.
    And he said, the criticism that the commission structure is often unclear to the consumers is no fault of the insurance companies. Each prospectus on VULs comes with an explanation of commission costs and fees in the back, he said.
    "You are always going to have isolated cases where abuses will occur and these receive a lot of publicity," he said. "But it would be inaccurate to say that selling practice problems are widespread throughout the industry."

    At least one independent financial advisor says he stands by VULs as valuable investment tools. But he noted consumers would be wise to seek out a fee-only financial advisors or someone they trust before buying into them.
    "[The critics] are absolutely right," said Lance Wallach, a tax advisor and frequent industry convention speaker. "You need to go with a low-load commission product or a no-load commission product."
    Even so, Wallach said his three VULs have performed well - since 1985 they've returned an average of about 18 percent (before costs are taken out).
    "Instead of putting your money in a mutual fund, where you will maybe lose money and pay taxes, move it into a variable life insurance policy," he said. "There are life insurance policies where you can actually make a lot of money."

    Good advice

    As you can see, differences of opinion on VULs abound.
    On one thing, however, most industry experts agree: You should always seek out a financial planner you trust when deciding where to invest your money. For unbiased advice on VULs, use an advisor you've worked with before, or call a group like NAPFA for suggestions. Explore all your options and read up on the risks versus rewards of these products.
    "It does have its place," said Edelman, noting he's licensed to sell VULs but rarely finds it appropriate for clients. "I can envision some scenarios where it's arguably a good idea [to buy VULs], but in my opinion, the overwhelming majority doesn't belong in them." Back to top
    --by staff writer Shelly K. Schwartz