Watch Out for Bad Retirement Plans

    Some of the attorneys who have represented TMA and physicians in Texas against health care payment plans are investigating claims for doctors who have been sold faulty retirement plans. In the last few years, physicians have been sold a number of retirement plans formed under Section 412(i) of the Internal Revenue Code, but the Internal Revenue Service (IRS) has begun targeting some of those plans.

    Generally speaking, a Section 412(i) plan is a tax-qualified retirement plan funded entirely by one or more life insurance policies or annuities. The employer claims tax deductions for contributions used by the plan to pay premiums on the insurance policies covering the employees. The plan may hold each policy until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

    So far, the IRS is focusing its investigations on a specific variant of these 412(i) plans because of the way in which the life insurance was structured. In the cases at issue, the insurance policy was designed so its cash surrender value was temporarily depressed significantly below the premiums that had been paid to that date. The policy was then distributed or sold to the employee for the amount of the (artificially depressed) cash surrender value; thereafter, the cash surrender value would increase significantly to be far closer to the amount that had been paid in premiums to date. As a result, the employer's recognized tax deductions were for amounts far in excess of what the employee recognized in income at the time he or she purchased or received the policies.

    If you have a 412(i) retirement plan that has been challenged by the IRS on this or any other grounds, or if you have any other concerns about the status of your retirement plan, e-mail Joe Whatley or call him at (888) 295-1923; or e-mail Tom Butler or call him at (800) 695-6750. They are with the Whatley, Drake & Kallas law firm in Dallas.


    Action , July 16, 2008

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