Tax Tips
Have a Retirement Plan? Don't Fall For These Ideas. - January 2006
Richard Scrivanich - Partner
The IRS has announced that it will devote substantial resources to stopping abusive tax shelters involving retirement and other benefit plans. If you have a retirement or benefit plan and are approached by an individual or firm suggesting an arrangement for your plan involving the following ideas, seek counsel to be sure the idea is legitimate. Often they are not.
401(k) accelerated deductions—
These transactions involve claims by employers of accelerated deductions for current contributions to retirement plans on compensation expected to be earned by participants in future years.
Deductions for excess life insurance in a section 412(i) or other defined benefit plan—
These arrangements purportedly enable businesses to generate large tax-deductible contributions to retirement plans and tax-free retirement distributions and death benefits. For example, special policies are made available only to highly compensated employees. The contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. Use of this “springing cash value” life insurance gives employers tax deductions that far exceed what the employee recognizes in income.
Collectively bargained welfare benefit funds—
These transactions are designed to avoid the applicable deduction limits on contributions to welfare benefit funds. Users claim that the benefits are being provided under a collective bargaining agreement.
“10-or-more-employer” plan—
This type of transaction involves the claiming of deductions under Internal Revenue Code sections 419 and 419A for contributions to multiple-employer welfare benefit funds. Promoters offer trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple-employer trusts and claim that all employer contributions are tax-deductible when paid.
Abusive Roth IRA transactions—
This arrangement involves the contribution of property to an IRA through a transaction that disguises the value of the contribution to circumvent Roth IRA contribution limits. The arrangement often involves attempts to shift value from a taxpayer’s business to a “Roth IRA corporation.”
Abusive S corporation ESOP arrangements—
These arrangements are intended to assist companies in avoiding tax rules designed to protect rank-and-file participants in employee stock ownership plans (ESOPs).
If you have any questions regarding your retirement plan or any other tax matter, please feel free to give me a call at (562) 698-9891.
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