UnderGround Forums
 

LegalGround >> Steve72: Small employer DB plans???

| Share | Email | Subscribe | Check IPs

5/12/08 6:52 PM
Ignore | Quote | Vote Down | Vote Up
seg
84 The total sum of your votes up and votes down Send Private Message Add Comment To Profile

Member Since: 3/28/05
Posts: 5246
 

I've got a client that services small employer pension plans.  They 'administer" pension plans in the laymen's sense of the word.  In other words, they do the recordkeeping, etc. I'm not sure what that makes them for ERISA purposes.

They are now going to take on the "administration" of a bunch of DB plans that are being sold to employers with 1-9 participants.  The plan assets will be invested partially in life insurance and partialy in mutual funds.  I assume these will be so-called 412(i) plans, which I have heard of but never worked with.

The client has received advice from someone that if the employer is an unincorporated sole proprietorship, that then the cost of any insurance purchased by the plan which is held as a plan asset is nondeductible for federal income tax purposes. 

Based on my pathetic knowledge and reserarch skills, it appears that IRC 404(e) would in fact disallow such a deduction for the amounts contributed on behalf of the owner/employee that were used to purchase insurance on the owner's life. 

It also appears that amounts contributed to the plan which are then used to purchase life insurance on non-owner employees through the plan would be deductible. 

Finally, it appears that any amounts invested in mutual funds would be deductible whether contributed on behalf of the owner/employee or non-employees.

If my analysis is correct, and given that I assume the owner adopted a DB plan to benefit primarily his retirement (i.e., the big contributions are going to be made for his benefit), it seems no unincorporated business should adopt one of these plans (putting aside for the moment why the hell the dude is not incorporated or in an LLC). 

Am I even remotely close in my analysis?  If the owner/employee simply incorporated (C or S) or formed an LLC (as long as not a single member disregarded for tax purposes) it appears the contributions allocable to insurance on the owner/employee would be deductible?   

I have to gather more facts, but I want to educate myself before calling the client so I don't sound completely lost.

5/14/08 7:39 AM
Ignore | Quote | Vote Down | Vote Up
Steve72
21 The total sum of your votes up and votes down Send Private Message Add Comment To Profile

Member Since: 1/1/01
Posts: 50845

My thoughts on 412(i) plans in a nutshell:  Get away.  Get faaaaarrrrr away.  Have your client get a disclaimer signed ASAP.


 


412(i) are fodder for scam-happy insurance salesman.  It is rare to run into one that is not massively noncompliant.  The individual or entity who implements the plan (generally) does so for no other reason than to garner commissions for the life insurance contract.


 


I have  few materials that I can look at on your specific question later on today...but please let your client know that these things can be really, really dangerous.

5/14/08 4:24 PM
Ignore | Quote | Vote Down | Vote Up
Steve72
21 The total sum of your votes up and votes down Send Private Message Add Comment To Profile

Edited: 05/19/08 10:46 AM
Member Since: 1/1/01
Posts: 50859

 Wait a minute.  I just re-read your post.




 


 412(i) plans need to be funded EXCLUSIVELY through life insurance.  You indicated that these are funded partly through mutual funds, and partly through life insurance.  Is that correct?


 

5/15/08 2:21 PM
Ignore | Quote | Vote Down | Vote Up
Steve72
21 The total sum of your votes up and votes down Send Private Message Add Comment To Profile

Member Since: 1/1/01
Posts: 50877

 I just wrote you a rambling book of an MMAMail.


| Share | Email | Subscribe | Check IPs

Reply Post

You must log in to post a reply. Click here to login.