A 412(i) plan is a “defined benefit plan” – a retirement plan, a pension plan that claims to offer very large tax deductions. It is funded with annuity and life insurance products.
Late 1990's/early 2000's, agents sold life insurance, and annuity policies to fund such plans.
Type of policy typically had high surrender charges, depressed cash value in early years - premiums paid by employer
After premiums funded for a few years, employee purchases policy for the current depressed cash surrender value
After policy purchased, surrender charges dramatically reduced, cash value “springs” to a high level
Employee could then borrow from high value policy for tax-free cash flow. They were called springing cash value policies.
Not all policies were of that type.
In 1995 IRS issued IRS notice 9534 warning that they would come after 419 plans. In 2004/2005, IRS began investigating and issued regulations deeming such plans as abusive tax shelters - began nationwide audits of such plans.
Plaintiffs in these matters are typically professional groups (doctors, dentists, small business owners) audited by the IRS - plans deemed abusive tax shelters – subject to substantial fees and penalties. Participants must file under IRS 6707A to avoid additional large fines. Material advisors, people that sold the plans and accountants that gave tax advice and got paid also get fined a minimum of $100,000 if they do not properly file and tell on their client.
Professionals then file suit against insurance companies and agents claiming they were misled in the sale of these plans and policies.
Allegations typically:
defendants represented that policies used to fund plans would be valid and subject to favorable future tax consequences
To Date - Mixed Results for Carriers:
1. Breach of contract
Claim dismissed - contract never promised to satisfy § 412 requirements, specifically stated that it did not guarantee any future tax consequences. Zarrella v. Pacific Life, 755 F. Supp. 2d 1231 (S.D. FL March 29, 2011) (Florida law)
Claim allowed to proceed - allegations pled existence of written and oral contracts promising tax benefits. Chau v. Aviva Life, 2011 U.S. Dist. LEXIS 54828 (N.D. Tex May 20, 2011) (applying Washington law).
2. Negligence
Claim dismissed because carrier is under no duty to advise its insured’s regarding tax consequences of transactions. Zarrella v. Pacific Life, (S.D. FL March 29, 2011).
3. Fraud/Misrepresentation
A. Future statements:
alleged misrepresentations made before the IRS pronouncements calling into question tax benefits of the various plans generally dismissed on grounds:
(i) statements were not false when made, or
(ii) statements were mere opinions or predictions that are not actionable.
Berry v. Indianapolis Life, 608 F. Supp. 2d 785 (N.D. Tex. 2009, August 26, 2010)
Zarrella v. Pacific Life, 755 F. Supp. 2d 1231 (S.D. FL March 29, 2011)
Chau v. Aviva Life, 2011 U.S. Dist. LEXIS 54828 (N.D. Tex May 20, 2011)
Courts generally determine that statements made by agents prior to 2004/2005 are “forward-looking” statements or “opinions” and that “as a matter of law, any representation or prediction by any alleged agent as to how the IRS would treat the 412(i) plans and finding thereof in the future is either an unactionable opinion or was unjustifiably relied upon.” Berry v. Indianapolis Life
To Date - Mixed Results for Carriers:
B. “Disclaimer of Reliance” defense – results mixed
Typically, in the plan documents, participant agrees he is not relying on carrier’s representations regarding the validity of the plan or its tax benefits - instead relying on own independent tax advisor
Cal. law – signed disclosure statements by plaintiffs preclude reasonable reliance on representations as a matter of law - claim dismissed.
Berry v. Indianapolis Life
Omni Home v. Hartford Life, 2008 Dist. LEXIS 35259 (S.D. Cal. April 29, 2008).
Texas and Wisconsin law – disclosure documents do not preclude reliance as a matter of law. Berry v. Indianapolis Life
To date, success in dismissing claims depends upon the different courts, and applicable governing law.
Note: If alleged misrepresentations made after applicable IRS pronouncement, then representations are not predictions or opinions, but rather statements regarding the existing state of the law – probably allowed to proceed.
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