Class Action Challenges Propriety of 412(e)(3) Annuities. Lance Wallach, expert witness.

On August 1, 2012, a putative class action lawsuit was filed in the District of Connecticut challenging the propriety of certain insurance contracts used to fund defined benefit plans described in section 412(e)(3) of the Internal Revenue Code. U.S. Telemanagement, Inc. v. Fidelity Security Life Insurance Co. et al., No. 3:12-cv-1110 JBA (D. Conn.).

Because we perceive that the complaint is attacking the appropriateness of the product, as well as the specifics of the product that the named defendant sold, it is a lawsuit that potentially could have industry-wide implications. In addition, as plaintiffs in some of the ERISA revenue-sharing lawsuits have attempted to do, the complaint alleges that the insurance company that sold the annuities acted as an ERISA fiduciary of the plans. This lawsuit thus extends the attack on insurance companies, as seen in the revenue-sharing class actions, that attempts to convert service providers into fiduciaries.

412(e)(3) Plans and Annuities

A 412(e)(3) plan is a tax-qualified, defined benefit pension plan that is funded with either annuities or a combination of annuities and life insurance. These sorts of plans are most often funded through annuities, and those annuities have come to be known as 412(e)(3) annuities, because of the section of the Internal Revenue Code that authorizes this sort of plan. Such 412(e)(3) plans are normally marketed to small businesses as vehicles that can provide large income tax deductions in connection with the establishment or continued funding of a pension plan. The annuities used to fund such a plan often are priced upon low assumed rates of return and other actuarial factors, which means that the employer is required to contribute a larger amount of money up front to fund the plan, and that in turn provides employers with larger tax deductions for their business.

The Lawsuit

The plaintiffs are two small Connecticut businesses that purchased 412(e)(3) annuities from defendant Fidelity Security Life (“FSL”), a Kansas City-based insurance company. Plaintiffs also named as a defendant CJA Associates, Inc., a corporation that is a registered agent of FSL, and is alleged to have promoted the sale of the annuities, and First Actuarial Corporation (“FAC”), a wholly owned subsidiary of CJA that is alleged to have been the sponsor of the plans. In addition, the complaint names an individual who is a registered agent of FSL and is alleged to have served as a tax and investment advisor to the two plaintiff businesses (the complaint also alleges that he was recently indicted by a grand jury for income tax fraud, but does not allege if it was related to his conduct in this case). All of the non-FSL defendants are alleged to have had some role in the sales process.

Both of the plaintiffs purchased 412(e)(3) annuities from FSL, allegedly as part of the promotional efforts of CJA. Plaintiffs allege that one of the two plaintiffs had their income tax deductions associated with the plans disallowed. There are no allegations about the tax treatment of the income tax deductions of the second plaintiff, but we assume from that omission that its tax deductions have not been disallowed or challenged.
Plaintiffs contend that the FSL annuities were inappropriate and unsuitable for defined benefit retirement plans for two main reasons. First, plaintiffs contend that the loads used to pay commissions associated with the annuities -- which they claim amounted to 95% of the first year’s contributions and various percentages later on -- were excessive when compared to other annuity products “readily available in the marketplace that achieved the same goals.” The complaint alleges that two other prominent insurance companies were offering comparable yielding annuities with no upfront loads or fees and had their total commissions built into the structure of the product “within the industry standard of 5-6%.” Second, plaintiffs contend that the principal advantage of the product -- its ability to generate large income tax deductions -- was illusory because the employer’s contributions are excessive in relation to the actual costs of the claimed plan benefits, which means that the tax deductions employers have taken are vulnerable to being disallowed. Plaintiffs point to the fact that one of the plaintiffs’ tax deductions were disallowed as evidence of this point.

The complaint asserts four claims: (1) breach of fiduciary duty under ERISA, (2) breach of ERISA’s co-fiduciary provisions, (3) non-fiduciary liability for knowing participation in a breach, and (4) prohibited transactions under section 406(a)(1)(C), the party-in-interest provisions. These are the same types of claims that we have seen asserted in ERISA revenue-sharing class action complaints against 401(k) plan service providers.

Like the claims in those cases, plaintiffs in this new class action claim that all of the defendants acted as fiduciaries of the two plans in various ways, and that defendants act in a similar fiduciary capacity for all plans in the putative class. Plaintiffs contend that all of the defendants acted as fiduciaries with respect to the conduct at issue because they exercised discretion and control over the plans’ assets, and offered investment advice for a fee with respect to monies of the plans (i.e., under section 3(21)(A)(i) and (ii) of ERISA). With respect to defendant CJA, which also allegedly acted as plan sponsor, plaintiffs also claim that it acted as a fiduciary because it had discretionary authority and responsibility in the administration of the plans (i.e., under section 3(21)(A)(iii) of ERISA).

Plaintiffs are pursuing their claims as a class action, and seek to represent the following class: all investors of employee benefit plan trust money under a CJA or FAC prototype or master employee benefit plan whose plan trust money was invested in FSL’s section 412(e)(3) annuities. The class is defined to exclude any investors who signed agreements to arbitrate any disputes arising from their investments.
Plaintiffs seek unspecified damages, but they ask the Court to presume that, if the investments had not been made in the FSL annuities, the assets would have been invested in the most profitable alternative investments available to them. As is common in ERISA cases, plaintiffs do not allege what more profitable alternative investments were available, aside from other annuities with comparable returns.
Potential Impact of this Case

We see at least three potential impacts from this new case. First, there is a potential that this class action will spawn a new wave of class actions directed at insurance companies that have sold 412(e)(3) annuities. Although plaintiffs nominally contend that the FSL annuities were unsuitable “as structured,” the complaint reads like a general attack on the suitability of such annuities under any circumstance, and a general attack on the insurance companies who acted as service providers with respect to retirement plans that were funded with 412(e)(3) annuities. Thus, as with the revenue-sharing class actions, where plaintiff’s counsel sued most major insurance company service providers, the Fidelity Life class action could be the first among many filed against the insurance industry.

Second, this lawsuit continues the unrelenting efforts by the ERISA class action plaintiffs’ bar to try to transform insurance companies – mere sellers of retirement products and services – into ERISA fiduciaries. We first observed these efforts in earnest in the revenue-sharing class actions we have defended, and this case appears to continue the trend in which plaintiffs attempt to recast ministerial tasks or sales efforts as fiduciary conduct. The rulings in this case could contribute to the developing body of law regarding what activities can cause entities to qualify as ERISA fiduciaries.

Third, this lawsuit could trigger other non-412(e)(3) lawsuits claiming that other life insurance or annuity-based retirement products and services are “too expensive” or “unsuitable” for retirement plans. We have already observed these same sort of efforts in the ERISA stock drop cases we have defended, in which plaintiffs contend that company stock was unsuitable, and more recently, in some of the plan sponsor revenue-sharing cases, in which plaintiffs contend that certain mutual fund offerings used as investment options are too expensive. This lawsuit could cause the ERISA class action plaintiffs’ bar to look for other types of products for which it could pursue similar claims.

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

11 comments:

  1. 419 lawuists audits sea nine veba cja and associates and other 419 412i plans and lawsuits www.taxaudit419.com
    We have knowledge of many different welfare benefit plans and experience in representing taxpayers who participate in those plans before the IRS. A sampling of the plans that we know well include:

    Millennium Plan
    Insured Security Plan
    Corporate Benefit Services Plan
    Sea Nine Associates VEBA
    Niche National Benefit Plans
    Professional Benefit Trust (PBT)
    Koresko STEP Plan
    Bisys Plan
    Xelan Plan
    Sterling Plan


    Question. What is the IRS position on these plans?

    Answer. The IRS position appears to be that all multiple employer welfare benefit plans funded with permanent life insurance are abusive tax scams. Their history is to open promoter audits on every such plan and eventually to obtain the client lists from the promoters and then audit their clients. The IRS position on single employer welfare benefit plans that are spin-offs of the multiple employer plans appears to be the same. Similarly, the IRS position on single employer welfare benefit plans invested in permanent life insurance where the employer deducts more than the term cost of insurance is that those plans are also abusive tax scams.



    Question. Has the IRS approved any multiple or single employer welfare benefit plan invested in permanent life insurance?

    Answer. Though an IRS private letter ruling is not immediately public, it is my understanding that the IRS has never “approved” of any multiple or single employer welfare benefit plan where permanent life insurance was used as a funding vehicle and the participating employer took a deduction for anything other than the current term insurance cost.



    Question. Are the IRS audits coordinated?

    Answer. Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions

    ReplyDelete
    Replies
    1. The Truth About Section 79 Permanent Insurance Plans


      Section 79 plans are a part of the employee benefit section of the Internal Revenue Service code (IRC). This code (IRC code Section 1.79) has been a part of the IRC since it was initially adopted in 1953. The President of the United States at that time was Dwight D. Eisenhower.

      Section 79 permanent insurance plans are sold within the United States by large national life insurance companies, all of whom have internal legal and compliance departments whose role is to ensure that the products sold by those companies are legal and comply with the rules and spirit of the law. Section 79 permanent insurance plans are sold legally in all 50 states of these United States of America. For the protection of consumers, each state has an insurance department that reviews and approves all company and agent licensing and products sold within that state. (see National Association of Insurance Commissioners at this link).

      So, here’s the truth about Section 79 Permanent Insurance Plans:
      • This is a legal insurance product, covered in the IRS Code number 1.79.
      • All group life insurance is covered under this IRS Code. Most governmental agencies, non-profit organizations and large Fortune 1,000 companies have section 79 as an employee benefit.
      • This is not a new code. The IRC 1.79 has been in the code since 1953.
      • All Section 79 products are fully vetted by major national insurance companies, their lawyers and compliance staffs, for sale in all 50 states. These are companies with long and successful histories of selling insurance products in the United States since the mid-1800’s.
      • Every state insurance department has fully vetted these Section 79 products and approved them for sales in their states. These products are legal for sale in all 50 states.
      • Section 79 plans are not “listed transactions.” Here is a list of all listed transactions according to the IRS – http://www.irs.gov/Businesses/Corporations/Listed-Transactions---LB&I-Tier-I-Issues

      For REAL information on Section 79 please contact Business Planning Group at BusinessPLanningGroup.com or call us directly at: (888) 545-2205 .

      Delete
  2. IRS audits sea nine veba 419 plan CJA and associates sea nine veba IRS audits and lawsuits for help www.vebaplan.com and other lance wallach on the net sites.
    We have knowledge of many different welfare benefit plans and experience in representing taxpayers who participate in those plans before the IRS. A sampling of the plans that we know well include:

    Millennium Plan
    Insured Security Plan
    Corporate Benefit Services Plan
    Sea Nine Associates VEBA
    Niche National Benefit Plans
    Professional Benefit Trust (PBT)
    Koresko STEP Plan
    Bisys Plan
    Xelan Plan
    Sterling Plan


    Question. What is the IRS position on these plans?

    Answer. The IRS position appears to be that all multiple employer welfare benefit plans funded with permanent life insurance are abusive tax scams. Their history is to open promoter audits on every such plan and eventually to obtain the client lists from the promoters and then audit their clients. The IRS position on single employer welfare benefit plans that are spin-offs of the multiple employer plans appears to be the same. Similarly, the IRS position on single employer welfare benefit plans invested in permanent life insurance where the employer deducts more than the term cost of insurance is that those plans are also abusive tax scams.



    Question. Has the IRS approved any multiple or single employer welfare benefit plan invested in permanent life insurance?

    Answer. Though an IRS private letter ruling is not immediately public, it is my understanding that the IRS has never “approved” of any multiple or single employer welfare benefit plan where permanent life insurance was used as a funding vehicle and the participating employer took a deduction for anything other than the current term insurance cost.



    Question. Are the IRS audits coordinated?

    Answer. Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions

    ReplyDelete
    Replies
    1. The Truth About Section 79 Permanent Insurance Plans


      Section 79 plans are a part of the employee benefit section of the Internal Revenue Service code (IRC). This code (IRC code Section 1.79) has been a part of the IRC since it was initially adopted in 1953. The President of the United States at that time was Dwight D. Eisenhower.

      Section 79 permanent insurance plans are sold within the United States by large national life insurance companies, all of whom have internal legal and compliance departments whose role is to ensure that the products sold by those companies are legal and comply with the rules and spirit of the law. Section 79 permanent insurance plans are sold legally in all 50 states of these United States of America. For the protection of consumers, each state has an insurance department that reviews and approves all company and agent licensing and products sold within that state. (see National Association of Insurance Commissioners at this link).

      So, here’s the truth about Section 79 Permanent Insurance Plans:
      • This is a legal insurance product, covered in the IRS Code number 1.79.
      • All group life insurance is covered under this IRS Code. Most governmental agencies, non-profit organizations and large Fortune 1,000 companies have section 79 as an employee benefit.
      • This is not a new code. The IRC 1.79 has been in the code since 1953.
      • All Section 79 products are fully vetted by major national insurance companies, their lawyers and compliance staffs, for sale in all 50 states. These are companies with long and successful histories of selling insurance products in the United States since the mid-1800’s.
      • Every state insurance department has fully vetted these Section 79 products and approved them for sales in their states. These products are legal for sale in all 50 states.
      • Section 79 plans are not “listed transactions.” Here is a list of all listed transactions according to the IRS – http://www.irs.gov/Businesses/Corporations/Listed-Transactions---LB&I-Tier-I-Issues

      For REAL information on Section 79 please contact Business Planning Group at BusinessPLanningGroup.com or call us directly at: (888) 545-2205 .

      Delete
  3. Expert Witness, Consulting, and Advisory Services for §412(i) and §412(e)(3) Defined Benefit Pension Plan Matters address technical and complex issues involving:
    §412(i) and §412(e)(3) Defined Benefit Pension Plans
    Annuity Contracts and Life Insurance Policies Held by the Plan
    Tax Issues: IRS and State Taxing Authority Audits; Tax Return and Tax Form Filings; Reportable Transactions; Listed Transactions; §6707A Penalties; Excise Tax
    Statute of Limitations: IRS Audit, State Taxing Authority Audit, and Tax Collection Issues
    Regulations and Compliance: Internal Revenue Code, State Revenue Code, ERISA
    Suitability, Non-Discrimination Rules, Fiduciary Duties
    Plan Administration
    Plan Contributions, Distributions, and Termination
    Liability Analysis
    Damage Analysis and Calculationsmater ial advisors and 419 lawsuits help www.vebaplan.com

    ReplyDelete
  4. LawyersAndSettlements.com · 2,362 like this
    August 2, 2012 at 2:46pm ·
    Law Suit Filed: CJA and FSL Class Action lawsuit

    Law Suit Filed: CJA and FSL Class Action lawsuit
    Class Action Filed against CJA and Associates and Fidelity Security Life

    ReplyDelete
  5. Material Advisors & 419 Plans Litigation
    412i, 419e plans litigation and IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS.

    Friday, November 1, 2013

    Class Action Challenges Propriety of 412(e)(3) Annuities. Lance Wallach, expert witness.
    On August 1, 2012, a putative class action lawsuit was filed in the District of Connecticut challenging the propriety of certain insurance contracts used to fund defined benefit plans described in section 412(e)(3) of the Internal Revenue Code. U.S. Telemanagement, Inc. v. Fidelity Security Life Insurance Co. et al., No. 3:12-cv-1110 JBA (D. Conn.).

    ReplyDelete
  6. Lance Wallach
    Shared publicly - Feb 17, 2014
    #Lawsuits

    CJA and associates 419 412i section 79 scam audits lawsuits

    seniorabuses.blogspot.com/.../cja-and-associates-419-412i-sectio...‎
    by Lance Wallach - in 48 Google+ circles
    Nov 27, 2012 - CJA and associates 419 412i section 79 scam audits lawsuits .... Defendant: CJA and Associates, Inc., Kent W. Hagan, Maurine Hagan, Hagan ...
    You and one other person +1'd this
    CJA and associates 419 plan lawsuits IRS audits Reviews | Scambook
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    Information about CJA and associates 419 plan lawsuits IRS audits was first submitted to Scambook on Dec 06, 2012. Since then the page has accumulated 0 ...
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    CJA and associates 419 plan Revi

    ReplyDelete
    Replies
    1. The Truth About Section 79 Permanent Insurance Plans


      Section 79 plans are a part of the employee benefit section of the Internal Revenue Service code (IRC). This code (IRC code Section 1.79) has been a part of the IRC since it was initially adopted in 1953. The President of the United States at that time was Dwight D. Eisenhower.

      Section 79 permanent insurance plans are sold within the United States by large national life insurance companies, all of whom have internal legal and compliance departments whose role is to ensure that the products sold by those companies are legal and comply with the rules and spirit of the law. Section 79 permanent insurance plans are sold legally in all 50 states of these United States of America. For the protection of consumers, each state has an insurance department that reviews and approves all company and agent licensing and products sold within that state. (see National Association of Insurance Commissioners at this link).

      So, here’s the truth about Section 79 Permanent Insurance Plans:
      • This is a legal insurance product, covered in the IRS Code number 1.79.
      • All group life insurance is covered under this IRS Code. Most governmental agencies, non-profit organizations and large Fortune 1,000 companies have section 79 as an employee benefit.
      • This is not a new code. The IRC 1.79 has been in the code since 1953.
      • All Section 79 products are fully vetted by major national insurance companies, their lawyers and compliance staffs, for sale in all 50 states. These are companies with long and successful histories of selling insurance products in the United States since the mid-1800’s.
      • Every state insurance department has fully vetted these Section 79 products and approved them for sales in their states. These products are legal for sale in all 50 states.
      • Section 79 plans are not “listed transactions.” Here is a list of all listed transactions according to the IRS – http://www.irs.gov/Businesses/Corporations/Listed-Transactions---LB&I-Tier-I-Issues

      For REAL information on Section 79 please contact Business Planning Group at BusinessPLanningGroup.com or call us directly at: (888) 545-2205 .

      Delete
  7. 412i-419 Plans
    419 & 412i benefit plan,abusive tax shelters, Lance Wallach Expert Witness

    Thursday, March 6, 2014
    Lance Wallach Life Insurance: complex scams involving life insurance policies
    Lance Wallach Life Insurance: complex scams involving life insurance policies: There are a lot of complex scams involving life insurance policies. What looks like a good idea on paper may leave you with fewer assets an..





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    1 day ago - By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, ... in that it must be funded exclusively by the purchase of individual life insurance ...
    How to Get Fined $100,000 by the IRS and Lose Your License www ...

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    3 days ago - insurance” “section 79 plans” “Lance Wallach

    ReplyDelete
  8. News & Informationoyee, where the amount of the death benefit equals the amount payable under the plan to the employee’s beneficiary and the death benefit proceeds under each policy are payable to the beneficiary designated by the employee. The trust has retained all other policy rights. During the year, the employer contributes to the trust an amount equal to the aggregate premiums due on the life insurance policies payable by the trustee.

    In the second situation, the facts are the same, except that the plan provides disability benefits to the employees. The trust is the owner and the named beneficiary of the life insurance policies held by the trust, which are intended to accumulate value to pay the disability benefits.

    In the first situation, the revenue ruling notes that “if the benefit provided through the fund is life insurance coverage, premiums paid on cash value life insurance policies by the fund are not included in the fund’s qualified direct cost whenever the fund is directly or indirectly a beneficiary under the policy.”

    In the second situation, if the benefit provided through the fund is other than life insurance coverage, “premiums paid on cash value life insurance policies by the fund are not included in the fund’s qualified direct cost whenever the fund is directly or indirectly a beneficiary under the policy. However, the fund’s qualified direct cost includes amounts paid as welfare benefits by the fund during the taxable year for claims incurred during the year.”

    Early Warning
    This past summer, a number of benefit practitioners already were warning that the use of “419(e) plans” was likely doomed because the plans did not comply with the IRC Sec. 409A rules relative to transfers of insurance policies or cash payments other than upon death.. A newspaper article published in July by the New York State Society of Certified Public Accountants noted that “most of the so-called ‘419(e)’ plans as well as the remaining 419A(f)(6) plans are in violation of the law and subject to hefty penalties.”

    The article also noted that sponsors of Sec. 419 plans had two choices: totally eliminate distributions from their plans (except medical reimbursement or death benefits), or comply with Sec. 409A and the regulations.

    A simple Web search by the editors of Spencer’s Benefits Reports on the day after the IRS issued its notices and revenue ruling turned up dozens of companies still advocating the use of “419(e) plans” to provide tax advantages to small businesses.

    ReplyDelete