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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has detailed a method by which defined benefit plans in the 412(i) audit program may resolve abusive tax avoidance transactions by recalculating contributions from the inception of the plan as if the minimum funding rules applied. Code Sec. 412(i) plans are pension plans funded solely by the purchase of life insurance and annuity contracts. If these plans meet the requirements of 412(i), they are not subject to the funding rules that apply to other defined benefit plans. Some 412(i) plans, however, have been used to take excessive deductions and avoid taxes that are properly owed. In other cases, plans claiming to be 412(i) plans have not followed the applicable rules. Generally, the deductions taken in these circumstances are not greater than the deductions that would have been allowed if a plan had not claimed to be a 412(i) plan. IRS requires that all defects be corrected.
The resolution method described by the IRS allows a purported 412(i) plan sponsor to treat the plan as if it had never claimed to be a 412(i) plan. The IRS will permit the plan sponsor to recalculate the minimum required and maximum deductible contributions from the inception of the plan as if the Code Sec. 412 funding rules, rather than the Code Sec. 412(i) rules applied. The plan sponsor must hire an enrolled actuary to complete the calculations for all prior years that the plan was treated as a 412(i) plan using reasonable assumptions chosen by and certified to by the enrolled actuary.
In addition, a spreadsheet documenting the funding calculations for all prior years, as well as a Schedule B for the current year, must be supplied to the IRS. An IRS actuary will then review the calculations and underlying assumptions and methods. After approval by the IRS actuary, the agent will compare the contributions deducted with the minimum required and maximum deductible contributions under the Code Sec. 412 funding rules. Appropriate penalties and sanctions will be calculated and applied only to open tax years.
The IRS stresses that no plan provision must be changed in order to comply. The calculations of the plan's enrolled actuary must be based on the plan provisions in effect when the plan was claiming to be a 412(i) plan.
If the plan is determined to be involved in a "listed transaction" (i.e., an abusive tax transaction involving a 412(i) plan), the option to retroactively apply the 412 funding rules to inception is only available to purported 412(i) plans without disqualifying defects. If a plan has disqualifying defects, it must be treated as if it were a nonqualified plan since inception. In this case, all remaining insurance policies must be distributed and all premiums paid on policies that were ever held by the plan must be taken into income. Examples of disqualifying defects that the auditors have found include (1) coverage failures from neglecting to include any non-highly compensated employees (NHCEs) in the plan and (2) nondiscrimination failures caused by providing more valuable whole life insurance to highly compensated employees and less valuable deferred annuity contracts to NHCEs.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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