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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 fines.
“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.
Advisers staring at a new ‘slew' of
litigation from small-business clients
Five-year-old change in tax has left some
small businesses and certain benefit plans subject to
IRS fines; the advisers who sold these plans may pay the price