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Regulation and Compliance > Federal Regulation > IRS

Experts Downplay Effects Of IRS 412(i) Moves

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NU Online News Service, Feb. 20, 2004, 5:58 p.m. EST – Insurance experts are downplaying the likely effects of the new Internal Revenue Service attack on aggressive 412(i) retirement plans.[@@]

The American Council of Life Insurers, Washington, put out a statement saying its members continue to study the guidance the IRS put out on the issue and the agency’s proposed 412(i) plan regulations.

But “our members’ initial read of this guidance is that most plans will not run afoul of what the IRS has indicated it is trying to limit,” the ACLI says.

Guardian Life Insurance Company of America, New York, is one of the ACLI members combing through the new 412(i) plan information for surprises.

Guardian has been selling insurance policies and annuity contracts to 412(i) plan sponsors since the 1960s, and it recently introduced a new family of 412(i) funding products that offer a guaranteed rate of return of 3%.

So far, Guardian does not believe the new IRS actions will have much of an effect, if any, on its 412(i) plan program, according to Katherine Readinger, the company’s director of life product support for individual markets.

“Guardian has always taken a very conservative approach to 412(i) planning to assure that all safe harbor and other requirements are met,” Readinger says in written comments about the guidance. “We have continued this philosophy in designing our new suite of whole life and annuity products and expect increased interest in Guardian offerings for those for which 412(i) is a benefit.”

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.

Because the sponsors must use funding vehicles that offer guaranteed benefits, the IRS exempts them from some of the recordkeeping requirements and other requirements that it imposes on bigger, more complicated defined benefit plans.

In the 1990s, business owners were more interested in defined contribution plans than defined benefit plans, but 412(i) plans have been getting more attention since the stock market slumped in 2001.

Some business owners like the idea of guaranteeing large, steady retirement benefit payments, and owners also have discovered that the low rates of return on guaranteed plan funding vehicles mean that they can deduct huge plan contributions from taxable income.

The IRS is attacking financial advisors and insurers that try to increase the permitted deductions even further by using “springing cash value life insurance” policies. Those policies use temporary, artificially low policy cash values to help employers recognize tax deductions far in excess of the cash value that the employees recognize as income.

The department also is attacking efforts to use differences in the life policies in 412(i) plans to compensate in favor of highly paid employees.

The IRS is asking for public comments on the proposed regulation and has scheduled a public hearing on the proposal for June 9.

Although the ACLI says the effects of the new IRS 412(i) plan guidance and proposed regulations would be modest, it says it does see some room for improvement.

“While ACLI is not fundamentally opposed to the proposed regulations, modifications are needed to clarify broad concepts contained in the proposal,” the ACLI says in its statement. “Technical clarifications and changes will help ensure only plans targeted by the regulation will be affected.”

The ACLI says it is looking at the rules for coming up with the fair-market value of a life policy at a time when the policy’s reserves and the policy’s cash value do not represent the policy’s fair-market value.

The IRS posted links to the new IRS 412(i) plan guidance, the proposed regulations and 2 related revenue rulings at,,id=120409,00.html


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