Claim Scenario “Do What You Know and Know What You Do”

Learning More About E&O Insurance Through Claim Scenarios

We think that every industry can help improve the service that the client receives by sharpening the skills of the professionals who do the work on a daily basis. This is the second article in a series for Life and Health Insurance Agents, the first one was for the “Vanishing Premium“.

This series will look in depth at Errors and Omissions claim scenarios so you can sharpen your insurance claim handling skills.

Training E&O Claim Scenario: The Background Of The Claim

John is a 55 year old who decided to retire a bit early.

He had saved $400,000 in a 401(k), had $100,000 in savings, owned a rental property that provided several hundred dollars amonth in extra income and was set to receive pension payments of $5,000 a month.

He knew he had to roll over his 401(k) money into a qualified plan or face tax consequences.

John also owned 10 acres of undeveloped real estate that he wanted to develop after his retirement. John was referred to a local agent to discuss his plans and options.

John indicated to the agent that between his pension, social security and the rental income, he was comfortable with his income stream going forward.  He told the agent that he wanted to start the development of the property immediately.  He estimated that he needed approximately $40,000 per year for 3 years to develop the property.

Agent Suggested Using “Series of Substantially Equal Periodic Payments(SOSEPPs)”

The agent mentioned that she thought John could roll over the 401(k) proceeds into an IRA and then take IRS §72(t) distributions to pay for the development.  Internal Revenue Code §72(t) provides a method by which someone can access their IRA funds prior to age 59½.

If done properly, one can schedule a “Series of Substantially Equal Periodic Payments” (SOSEPPs) tax/penalty free.  However, these payments must be calculated according to the prescribed methods in the code section and continue without change for 5 years or until age 59½, whichever is earlier.  If the SOSEPPs are not in code compliance, all of the payments will be subject to ordinary income tax, a 10% penalty and interest on the unpaid tax or penalty from the date that the client “broke” the SOSEPPs.

John agreed to this proposal. The agent rolled $200,000 of the 401(k) into an IRA account in order to set up the 72(t) distributions and rolled the other $200,000 into an annuity held in an IRA account in order to generate growth.

The Error by the Agent

However, when the agent calculated the eligible SOSEPPs distribution amount, she did the calculation based on the entire roll overamount of $400,000 and not the $200,000 in the 72(t) account.

John then began receiving the SOSEPP distributions.

The E&O Claim: SOSEPPs Were Inaccurate

Three years later, it was discovered that the SOSEPPs were double of what was allowable under 72(t).  John was now responsible for back taxes, penalties and interest on the overpayments.  John pursued a claim against the agent for those amounts as well as legal and accounting fees to rectify the errors.

It was later determined that the agent had only done one prior 72(t) plan and was unclear of the various methods of properly calculating the SOSEPPs.

Lesson Learned: Get Expert Advice When You’re Not Experienced

Make sure you are comfortable with the recommendations you are making and knowledgeable about the methods or products being recommended.

If you have a plan or product that you believe may work for your client but have only limited experience or comfort with it, seek out assistance from the product sponsors or more experienced colleagues.

In this case, if the agent was not comfortable with the mechanics of setting up the 72(t) distributions, an accountant should have been consulted for advice.

DISCLAIMER:

This article/blogpost is provided for informational purposes only, does not necessarily represent Aspen’s views, and reflects the opinion of the authors in light of market, regulatory and other conditions which may change over time. Aspen does not undertake a duty to update the article/blogpost.