Pension Plan Schemes: Was Your Company Duped?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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While we were all fascinated by the Bernie Madoff Ponzi scheme debacle, another scheme involving Internal Revenue Code Section 412(i) pension plans is equally controversial, yet much less publicized – and the companies involved are saying they were duped by insurance agents and pension plan designers.

If it seems too good to be true, it probably is…

Small business owners in high tax brackets say that they were told by insurance agents that they could contribute up to ten times more funds into an employee retirement plan and withdraw up to 80% of those funds on a pre-tax basis. However, as the saying goes, “If it seems too good to be true, it probably is.”

Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans, says that the companies who trusted their insurance agents feel as though they’ve been duped. He explained:

I would say that for the most part they were being duped because the agent comes in and tells them that he can get them a tax deduction that’s up to 10 times as large as the one they’ve been taking and all the money will go into their retirement account. In five years, they’ll get 80 percent of it out without having to pay any taxes on it – and it’s all completely legal. That was the story that was being sold and some of these companies went as far as to get a letter from the IRS and present it to the client as if the IRS was giving their blessing to the transaction.

Shouldn’t they have known better?

Actually, no, according to Burgess, who says that perpetrators went beyond typical sales gimmicks by using tax preparers, law firms and glossy brochures to reel business owners in. He told us:

Imagine that you’re having this proposal put in front of you, you’ve got an insurance agent and then you’ve got a pension designer, and they present you with a letter from the IRS that looks like the plan has been approved. Then you’ve got a major insurance company with their full-color, glossy brochures that also promote these plans and make it look like everything is okay.

On top of that, there were also tax preparers who said, ‘Yeah, this looks like it’s okay.’ Then, the final piece was a very slick, very formal letter of opinion written by a major law firm that says, ‘We’ve reviewed this plan and we believe that it’s okay as well.’ When you’re presented with that kind of background, what’s left to question, really?

Who are victims suing?

Now that the IRS has discovered the schemes, it is imposing huge fines on companies that participated – often without knowing that they were doing anything illegal. Some have even had to file for bankruptcy. They’re angry – and they’re suing. Burgess says that they’re suing the agent, the insurance company, the pension plan designer, and in many cases, they’re suing the tax advisors as well if they gave their blessing.

Many companies anxious to settle

Burgess says that many of the perpetrators are settling these cases out of court. “I have negotiated directly with a few of the insurance companies for my clients and we’ve been able to get back anywhere from 50 to 100 percent of their contributions. There are a lot of pending lawsuits right now – I mean hundreds of pending lawsuits – and most of them are probably going to settle out-of-court.”

If you’ve been the victim of a fraudulent or abusive tax shelter scheme, contact an experienced pension fraudt attorney to discuss your situation and evaluate what remedies may be available to you.

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