What are 412(i) pension plans?

Section 412(i) of the Internal Revenue Code essentially says that you can have a pension plan funded only with guaranteed life insurance or guaranteed annuity products, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He says that if you use those products as the funding vehicles, then you basically escape or pass around some of the typical requirements of a pension plan – so, effectively, it’s a pension plan that uses either an annuity or a specific type of life insurance policy as the funding vehicle.

Plan promoters focused on two points

There have been many scams and schemes surrounding 412(i) plans. Burgess says these plans were being heavily, heavily marketed going back to around 2001 and that there were two points in which promoters of these plans were focused:

• The first point was that they could manipulate the pension plans so that you could make contributions that were much larger than a traditional pension plan – two times as much, three times as much and sometimes even five or ten times as much as a traditional plan.
• The second point they focused on was using a very specific type of life insurance policy. They figured how to take 80 percent of the money that was in the pension plan out on a pre-tax basis – effectively defrauding the government of income taxes.

He says that they marketed those two points very heavily, but that the Internal Revenue Service (IRS) caught wind of it and in 2004 made 412(i) plans what’s called a reportable transaction, meaning that if you were involved in a 412(i) plan, then you needed to report that to the IRS.

Who was perpetrating these scams?

It was a combination of insurance agents and pension plan designers were perpetrating these scams, according to Burgess, and he says that they were working together. He explained:

The pension plan designers were a small group who were promoting these plans to insurance agents to sell for their clients across the nation. Those are the two big perpetrators. The motivation here was the extremely large commission on the policies that were used in these plans. The policies were only offered by about five companies, but the commissions on average were 80 to 100 percent of the plan contribution. They were extremely large commissions benefiting those two because both the agent and the pension promoter were both sharing the commission.

If you've been the victim of a fraudulent or abusive tax shelter scheme, contact an experienced pensions fraud attorney to discuss your situation and evaluate what remedies may be available to you.