Advisers Staring at a New 'Slew' of Litigation
    from Small-Business Clients

    By: Jessica Toonkel Marquez

    October 14, 2009

    Financial advisers who have sold certain types of retirement and other benefit plans
    to small businesses might soon be facing a wave of lawsuits — unless Congress
    decides to take action soon.

    For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-
    benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses
    as a way of providing such benefits to their employees, while also receiving a tax

    However, in 2004, Congress changed the law to require that companies file with the
    Internal Revenue Service if they had these plans in place. The law change was
    intended to address tax shelters, particularly those set up by large companies.

    Many companies and financial advisers didn't realize that this was a cause for
    concern, however, and now employers are receiving a great deal of scrutiny from the
    federal government, according to experts.

    The IRS has been aggressive in auditing these plans. The fines for failing to notify the
    agency about them are $200,000 per business per year the plan has been in place and
    $100,000 per individual.  So advisers who sold these plans to small business are now
    slowly starting to  become the target of litigation from employers who are subject to these   

    “There is a slew of litigation already against advisers that sold these plans,” said
    Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week
    asking me to be an expert witness on these cases.”

    Mr. Wallach declined to cite any specific suits. But one adviser who has been selling
    412(i) plans for years said his firm is already facing six lawsuits over the sale of such
    plans and has another two pending.

    “My legal and accounting bills last year were $864,000,” said the adviser, who asked
    not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue

    Currently, the IRS has instituted a moratorium on collecting these fines until the end
    of the year in the hope that Congress will address the issue.

    In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and
    Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand
    that Congress is still considering this issue and that a bipartisan, bicameral bill may
    be in the works … To give Congress time to address the issue, I am writing to extend
    the suspension of collection enforcement action through Dec. 31.”

    But with so much of Congress' attention on health care reform at the moment, experts
    are worried that the issue may go unresolved indefinitely.

    If Congress doesn't amend the statute, and clients find themselves having to pay
    these fines, they will absolutely go after the advisers that sold these plans to them.

    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, or visit and

The information provided herein is not intended as legal, accounting, financial or any type
of advice for any specific individual or other entity. You should contact an appropriate
professional for any such advice.
All rights reserved.
Advisors Staring at a New 'Slew' of
Litigation from Small Business