NU Online News Service, Feb. 13, 2004, 4:52 p.m. EST, Washington – The U.S. Treasury Department is going after aggressive 412(i) retirement plans.[@@]
The department has tackled what it says are abuses in the 412(i) plan market by proposing a regulation that would affect transfers of life insurance contracts from an employer or tax-qualified plan to an employee. Under the proposed regulation, any such transfer would have to be taxed at its full fair market value.
Section 412(i) of the Internal Revenue Code lets employers use guaranteed life insurance policies and annuity contracts to fund simple defined benefit retirement plans.
Treasury says its proposal will prevent taxpayers from using artificial devices to understate the value of the life insurance policies and annuity contracts used to fund 412(i) plans.
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“The guidance targets specific abuses occurring with Section 412(i) plans,” says Pam Olson, an assistant Treasury secretary. “There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”
Employers can deduct 412(i) plan contributions from taxable income. The plan must use the contributions to pay for the insurance contracts and annuities that will fund the pension benefits.
The plan may hold a contract 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.
Treasury says some firms have set up 412(i) plans for highly compensated employees that use plan contributions to buy life insurance contracts designed so that the cash surrender value temporarily will be depressed to the point that it is significantly below the value of the premiums paid.