Legislation that would shield advisers from lawsuits in the works

The Senate Finance Committee has drafted a bill that would reduce the chances of financial advisers getting hit with lawsuits because of disputes about certain retirement plans and other types of benefit programs sold to small businesses.
For years, advisers and insurance brokers had 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 for them to provide benefits to employees, while also receiving a tax break.
Butadvisers who sold these plans have become vulnerable in recent years to lawsuits because the IRS has become more aggressive in auditing many small businesses. And specifically, in 2004, Congress required companies for the first time to file notifications with the Internal Revenue Service if they had 419s and 412(i)s in place.
Some small businesses have become subject to IRS fines and penalties if they don’t file the proper documentation — and have sued advisers who sold them the plan for neglecting to inform them of their obligation. There is a moratorium on fines until the end of the year).
Congress is now moving to take action that would clarify the consequences for not reporting these plans to the IRS — and potentially reduce some of the substantial penalties that could be imposed on small businesses.
Committeee Chairman Max Baucus, D-Mont., is working with Sen. Charles Grassley, R-Iowa, the ranking Republican, and House colleagues to introduce a fix “in the coming days,” a Senate Finance Committee aide said.
Specifically Congress is planning to amend the statute so that the penalties employers have to pay are proportional to the tax benefit they have received, said Alex Brucker, director of the Small Business Council of America, who met with members of Congress earlier this week.
Currently, the fines for failing to notify the agency are $200,000 per business per for each year that the plan has been in place — and $100,000 for each individual covered. The details of the new penalty structure outlined in the draft were not immediately available.
The bill, which will most likely be attached to another bill that extends tax codes, would be retroactive to Jan. 1, 2008, Mr. Brucker said.
“We believe that this legislation will be passed this year,” he said. “This legislation will obviously mitigate any damages against advisers being sued.”
Over the next few days, the Small Business Council of America — which represents small firms on pension, tax and health care issues — will be gathering letters from businesses that have suffered these penalties. Mr. Brucker said that the Small Business Council of America plans to send these letters directly to Senate and House leaders.
The imminent bill is particularly good news for advisers who are in dispute with present or former clients to whom they sold these plans, said Kathleen Barrow, a partner in workplace law firm Jackson Lewis LLP, who is helping several employer clients respond to IRS audits.
“I don’t think that we will see small businesses withdraw lawsuits, but I certainly think it will help resolve disputes in and outside of litigation,” Ms. Barrow said.