Why You Should Not Own Mutual Funds at this time --- Mutual Funds can be considered dangerous to own. We have information on this and many other financial pitfalls in the business world.
Sign In Create Account Logotions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes "reflecting the tax consequences of the strategy", it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still "contributing", and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e) transactions, appears to be concerned with the employer's contribution/deduction amount rather than the continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an audit.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.taxlibrary. us.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice. Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 50 national conventions annually and writes for more than 30 publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007. #3 IRS attacks 412i plans: post #3 VEBAPLAN Registered User
Registered 96 posts Posted 06 December 2010 - 02:15 PM VEBAPLAN, on Dec 6 2010, 09:38 AM, said: [Deleted; Lance, I am not comfortable with a message on the message boards that includes a reprint of an email from an IRS employee that was not intended by the author to be public. -- David Baker, message boards administrator]
sorry, it was a very good article. they are the IRS and would not think twice about doing something to other people clients. we are using it in a tax court case. Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 50 national conventions annually and writes for more than 30 publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007.
Watch Out—IRS Plans to Attack Abusive 412(i) Plans A special type of insurance policy was designed to use with Section 412(i) plans. It has an extraordinarily low cash surrender value for a number of years in order to minimize the taxes payable on distribution. The policy may be transferred to the participant as a taxable distribution after six or seven years when the cash value is low. Shortly after the policy is distributed the cash surrender value jumps to a much higher amount. The participant thus obtains the policy at a very low cost after having received major tax deductions for several years. The IRS believes this to be an abusive tax shelter and they have announced that they will try to eliminate the use of these “springing cash value” policies.
What are 412(i) Plans and what are the problems with these plans 412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
During the past few years the Internal Revenue Service (IRS) has aggressively audited §412(i) plans. Section 412(i) plans are a type of defined benefit plan funded exclusively by annuity or life insurance contracts. The crackdown began in 2004 when the IRS realized companies were using §412(i) plans to establish abusive tax shelters. In order to combat such abuses, Congress imposed large fines on taxpayers who failed to inform the IRS of their participation in tax shelter transactions ($100,000/yr, per offense for individuals and $200,000 for businesses).
Additionally, Congress did not grant the IRS any flexibility in imposing the fines, nor did it grant taxpayers any opportunity for review of the decisions. Congress is currently examining proposals to allow for judicial review of the fines, to give the IRS discretion in imposing the penalties and to impose a more proportional punishment. If implemented, such changes would be retroactive, thereby granting currently affected business owners some relief. The IRS originally set September 30th as the date to begin collections on the large penalties. However, on September 24th, the IRS extended the halt on collections until year-end in hopes that Congress will pass legislation to address the issue.
Nevertheless, relief from Congress is currently lacking. Most of the targeted companies have been small employers – consisting of between one to fifteen participants. Small business owners should be particularly wary of §412(i) plans, as they could find themselves bankrupt if Congress does not alter its stance and the IRS imposes the hefty fines. Although the IRS has targeted §412(i) plans, it is important to note that not all §412(i) plans are abusive and subject to punishment. However, due of the high level of taxes and penalties that the IRS could potentially impose upon improperly structured 412(i) plans, it is imperative that taxpayers expeditiously assess the appropriateness of their plans.
Abuses of 412(i) Plans Anything can be abused. One sees it daily in the news. 412(i) plans are no exception. Unfortunately, there are some very aggressive individuals and administrators that have abused these plans.
On February 13, 2004, Pam Olson, Assistant Secretary for Tax Policy at the Department of Treasury, was quoted during the release of Revenue Rulings addressing 412(i) plans as saying: "The guidance targets specific abuses occurring with section 412(i) plans," stated Assistant Secretary for Tax Policy Pam Olson. "There are many legitimate section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements."
See text here: IRS Shuts down abuse in retirement plans.pdf See web site here: www.irs.gov/newsroom/article/0,,id=120409,00.html
Does your 412(i) plan have one or more of the following?
Different type of life policy on the principal(s) than on the rank-and-file? Life insurance on the principal(s) and none on the rank-and-file? A mix of policies from different carriers? “Excess” life insurance? In other words, an amount of life insurance coverage on participant(s) that exceeds the allowable payout under Revenue Ruling 74-307 or Revenue Ruling 2004-20? Term Life Insurance? Universal Life Insurance? Does your plan exclude more than 30% of the Non-highly Compensated Employees yet include all of the Highly Compensated Employees? If you have employees who meet the age and service eligibility requirements, does your plan cover at least the greater of 2 participants or 40% of those employees? If you answered “YES” to one or more of the above, your plan may be subject to IRS penalties or disqualification. You may even be subject to the Listed Transaction rules!
Did you know that the fine for a Listed Transaction can be as high as $200,000 under the American Jobs Creation Act of 2004? Did you know there is no provision for the fine to be waived?
Almost every physician-investor has been pitched the 412(i) defined-benefit plan. At least once they've been told how it's the greatest income tax reduction plan for small business owners today. If you purchased a 412(i) defined-benefit plan in the past few years as a tax shelter, however, you could be in a world of trouble.
Popular Pitch Sinks
Let's discuss how the 412(i) plan works. If a physician- investor puts $250,000 into a 412(i) plan every year for 5 years as a tax-deductible expense, they'll eventually fund $1.25 million over that period. The cash surrender value (CSV) of the policy at the end of the 5th year will be $250,000. The physician-investor will then purchase the life policy from the 412(i) plan for that $250,000 CSV and think they got a great deal since the cash account value (CAV) of the policy is really $1.1 million. After waiting for surrender charges in the life policy to evaporate, they will take income tax–free loans from the policy.
Buying a policy with a low CSV and a high CAV seems like a steal of a deal since the investor only pays 20% of the value of the asset when they purchase it out of the 412(i) plan. This was supposed to save the investor 80% of the tax on that money. If this sounds too good to be true, it didn't to many physician-investors who allowed insurance agents to sell them 412(i) plans. After looking at the plan, the IRS eventually shut it down. Ironically, the beginning of the end of 412(i) plans started on Friday, Feb. 13, 2004.
Washington Takes Over
IRS Revenue Procedure 2004-16 basically states that the fair market value of a life insurance policy that comes out of a 412(i) defined-benefit plan should be based on the premiums paid and not on the CSV or internal reserve value of the insurance company. How will this affect a recently implemented 412(i) plan? The investor will not be able to purchase the life policy from the 412(i) plan for the CSV, which is 80% lower than the premiums paid. Instead, they will have to use the premiums paid as the value (minus minor term costs), which basically destroys the tax-favorable nature of a 412(i) plan.
In addition, Revenue Procedure 2004-20 states that the IRS doesn't want excess life insurance purchased inside a 412(i) plan. In this case, the IRS is referring to insurance contracts where the death benefits exceed the death benefits provided to the employee's beneficiaries under the terms of the plan, whereby the balance of the proceeds revert to the plan as a return on investment. IRS Revenue Procedure 2004-20 also states that if excess death benefits are purchased, those deductions will be disallowed in the current tax year and will be spread out, if allowable, over future years. Furthermore, any nondeductible premiums will be subject to a 10% excise tax.
Finally, Revenue Ruling 2004-21 says that a qualified plan cannot discriminate in favor of highly compensated employees by buying life policies for nonhighly compensated employees that aren't inherently equal. Note: The word inherently seems to indicate that the IRS has no idea how to define certain standards or rules in their attempt to give final guidance to taxpayers. As is the case with a lot of revenue rulings and regulations on advanced tax topics, the IRS doesn't always know how to give guidance on what should be done. Instead, it tries to muddy the waters and scare investors so that certain tax plans aren't used due to uncertainty about the law.
Sign In Create Account Logotions for these plans continue to
ReplyDeleteenjoy the benefit of previous tax deductions by continuing the deferral of income from
contributions and deductions taken in prior years. While the regulations do not expand on
what constitutes "reflecting the tax consequences of the strategy", it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation
of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make
contributions or claim tax deductions continue to pay administrative fees. Sometimes,
money is taken from the plan to pay premiums to keep life insurance policies in force. In
these ways, it could be argued that these taxpayers are still "contributing", and thus still
must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the
purpose of a particular transaction as described in the published guidance that caused such
transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)
transactions, appears to be concerned with the employer's contribution/deduction amount
rather than the continued deferral of the income in previous years. This language may
provide the taxpayer with a solid argument in the event of an audit.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the
AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial
and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive
insurance plans. He speaks at more than ten conventions annually, writes for over fifty
publications, is quoted regularly in the press and has been featured on television and radio
financial talk shows including NBC, National Pubic Radio's All Things Considered, and
others. Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling
books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.taxlibrary.
us.
The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 50 national conventions annually and writes for more than 30 publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007.
#3 IRS attacks 412i plans: post #3 VEBAPLAN
Registered User
Registered
96 posts
Posted 06 December 2010 - 02:15 PM
VEBAPLAN, on Dec 6 2010, 09:38 AM, said:
[Deleted; Lance, I am not comfortable with a message on the message boards that includes a reprint of an email from an IRS employee that was not intended by the author to be public. -- David Baker, message boards administrator]
sorry, it was a very good article. they are the IRS and would not think twice about doing something to other people clients. we are using it in a tax court case.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 50 national conventions annually and writes for more than 30 publications. For more information and additional articles on these subjects, visit www.vebaplan.com or call 516-938-5007.
Watch Out—IRS Plans to Attack Abusive 412(i) Plans
ReplyDeleteA special type of insurance policy was designed to use with Section 412(i) plans. It has an extraordinarily low cash
surrender value for a number of years in order to minimize the taxes payable on distribution. The policy may be
transferred to the participant as a taxable distribution after six or seven years when the cash value is low. Shortly
after the policy is distributed the cash surrender value jumps to a much higher amount. The participant thus obtains
the policy at a very low cost after having received major tax deductions for several years. The IRS believes this to
be an abusive tax shelter and they have announced that they will try to eliminate the use of these “springing cash
value” policies.
What are 412(i) Plans and what are the problems with these plans
ReplyDelete412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The plan uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
Where did the problems start?
In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.
These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with administering the plans, the policies of insurance had high commissions and high surrender charges.
These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would bloom like a rose, and the individual would have a policy with significant cash value which he or she could withdraw tax free.
Who signed off on the plan?
Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that many of the plans complied with the tax code.
So what is the problem?
In the early 2000s, IRS officials began questioning Richard Smith and others and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code.
In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of $100,000 per year, and corporations $200,000 per year. These penalties are often referred to as section 6707 penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand.
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.
During the past few years the Internal Revenue Service (IRS) has aggressively audited §412(i) plans. Section 412(i) plans are a type of defined benefit plan funded exclusively by annuity or life insurance contracts. The crackdown began in 2004 when the IRS realized companies were using §412(i) plans to establish abusive tax shelters. In order to combat such abuses, Congress imposed large fines on taxpayers who failed to inform the IRS of their participation in tax shelter transactions ($100,000/yr, per offense for individuals and $200,000 for businesses).
ReplyDeleteAdditionally, Congress did not grant the IRS any flexibility in imposing the fines, nor did it grant taxpayers any opportunity for review of the decisions. Congress is currently examining proposals to allow for judicial review of the fines, to give the IRS discretion in imposing the penalties and to impose a more proportional punishment. If implemented, such changes would be retroactive, thereby granting currently affected business owners some relief. The IRS originally set September 30th as the date to begin collections on the large penalties. However, on September 24th, the IRS extended the halt on collections until year-end in hopes that Congress will pass legislation to address the issue.
Nevertheless, relief from Congress is currently lacking. Most of the targeted companies have been small employers – consisting of between one to fifteen participants. Small business owners should be particularly wary of §412(i) plans, as they could find themselves bankrupt if Congress does not alter its stance and the IRS imposes the hefty fines. Although the IRS has targeted §412(i) plans, it is important to note that not all §412(i) plans are abusive and subject to punishment. However, due of the high level of taxes and penalties that the IRS could potentially impose upon improperly structured 412(i) plans, it is imperative that taxpayers expeditiously assess the appropriateness of their plans.
Abuses of 412(i) Plans
ReplyDeleteAnything can be abused. One sees it daily in the news. 412(i) plans are no exception. Unfortunately, there are some very aggressive individuals and administrators that have abused these plans.
On February 13, 2004, Pam Olson, Assistant Secretary for Tax Policy at the Department of Treasury, was quoted during the release of Revenue Rulings addressing 412(i) plans as saying: "The guidance targets specific abuses occurring with section 412(i) plans," stated Assistant Secretary for Tax Policy Pam Olson. "There are many legitimate section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements."
See text here: IRS Shuts down abuse in retirement plans.pdf
See web site here: www.irs.gov/newsroom/article/0,,id=120409,00.html
Does your 412(i) plan have one or more of the following?
Different type of life policy on the principal(s) than on the rank-and-file?
Life insurance on the principal(s) and none on the rank-and-file?
A mix of policies from different carriers?
“Excess” life insurance? In other words, an amount of life insurance coverage on participant(s) that exceeds the allowable payout under Revenue Ruling 74-307 or Revenue Ruling 2004-20?
Term Life Insurance?
Universal Life Insurance?
Does your plan exclude more than 30% of the Non-highly Compensated Employees yet include all of the Highly Compensated Employees?
If you have employees who meet the age and service eligibility requirements, does your plan cover at least the greater of 2 participants or 40% of those employees?
If you answered “YES” to one or more of the above, your plan may be subject to IRS penalties or disqualification. You may even be subject to the Listed Transaction rules!
Did you know that the fine for a Listed Transaction can be as high as $200,000 under the American Jobs Creation Act of 2004? Did you know there is no provision for the fine to be waived?
Almost every physician-investor has been pitched the 412(i) defined-benefit plan. At least once they've been told how it's the greatest income tax reduction plan for small business owners today. If you purchased a 412(i) defined-benefit plan in the past few years as a tax shelter, however, you could be in a world of trouble.
ReplyDeletePopular Pitch Sinks
Let's discuss how the 412(i) plan works. If a physician- investor puts $250,000 into a 412(i) plan every year for 5 years as a tax-deductible expense, they'll eventually fund $1.25 million over that period. The cash surrender value (CSV) of the policy at the end of the 5th year will be $250,000. The physician-investor will then purchase the life policy from the 412(i) plan for that $250,000 CSV and think they got a great deal since the cash account value (CAV) of the policy is really $1.1 million. After waiting for surrender charges in the life policy to evaporate, they will take income tax–free loans from the policy.
Buying a policy with a low CSV and a high CAV seems like a steal of a deal since the investor only pays 20% of the value of the asset when they purchase it out of the 412(i) plan. This was supposed to save the investor 80% of the tax on that money. If this sounds too good to be true, it didn't to many physician-investors who allowed insurance agents to sell them 412(i) plans. After looking at the plan, the IRS eventually shut it down. Ironically, the beginning of the end of 412(i) plans started on Friday, Feb. 13, 2004.
Washington Takes Over
IRS Revenue Procedure 2004-16 basically states that the fair market value of a life insurance policy that comes out of a 412(i) defined-benefit plan should be based on the premiums paid and not on the CSV or internal reserve value of the insurance company. How will this affect a recently implemented 412(i) plan? The investor will not be able to purchase the life policy from the 412(i) plan for the CSV, which is 80% lower than the premiums paid. Instead, they will have to use the premiums paid as the value (minus minor term costs), which basically destroys the tax-favorable nature of a 412(i) plan.
In addition, Revenue Procedure 2004-20 states that the IRS doesn't want excess life insurance purchased inside a 412(i) plan. In this case, the IRS is referring to insurance contracts where the death benefits exceed the death benefits provided to the employee's beneficiaries under the terms of the plan, whereby the balance of the proceeds revert to the plan as a return on investment. IRS Revenue Procedure 2004-20 also states that if excess death benefits are purchased, those deductions will be disallowed in the current tax year and will be spread out, if allowable, over future years. Furthermore, any nondeductible premiums will be subject to a 10% excise tax.
Finally, Revenue Ruling 2004-21 says that a qualified plan cannot discriminate in favor of highly compensated employees by buying life policies for nonhighly compensated employees that aren't inherently equal. Note: The word inherently seems to indicate that the IRS has no idea how to define certain standards or rules in their attempt to give final guidance to taxpayers. As is the case with a lot of revenue rulings and regulations on advanced tax topics, the IRS doesn't always know how to give guidance on what should be done. Instead, it tries to muddy the waters and scare investors so that certain tax plans aren't used due to uncertainty about the law.
-