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Retirement Plan Claims

Posted by Gary Sutherland on Wed, Jan 20, 2016 @ 12:08 PM

Several of the major CPA professional liability insurance carriers have experienced an increase in claims involving both advice and planning involving pension plans and Individual retirement (IRAs) plan distributions.
Several factors are likely to have caused this increase. This article will discuss these factors and techniques that may reduce future claims.
The following factors have contributed to the increase in retirement plan claims.

  • The multitude of plans available for both businesses and individuals
  • The complexity of delaying the age when social security is taken advise
  • The complexity in the tax code for retirement plans, particularly early withdrawal distributions
  • The increase in distributions from plans as a result of taxpayers reaching retirement and the increase in distributions resulting from the sluggish economy.


In the past the traditional pension plan was either a defined benefit plan or a defined contribution plan or a combination of the two. Today here are SEPS, SARSEPS, SIMPLE PLANS, ROTHs, 401Ks, just to name a few. Clients expect and assume their CPA is knowledgeable about all plans. To further complicate matters there are both qualified and nonqualified plans. With such a large selection and that one plan fits any particular taxpayer is a daunting task for the CPA. Consequently, if the wrong plan in hind sight was selected, the CPA is sure to be blamed.

Establishing a retirement plan is seldom the responsibility of the CPA, however advice and the tax treatment of distributions, particularly early distributions is frequently deemed to be the responsibility of the CPA. Careful timing of distributions, advice regarding required minimum distributions (RMDs), and the exceptions to early withdrawal penalties have resulted in claims against CPAs.

With 10,000 baby boomers retiring each day, the CPA is often called on the advise their clients on how to prepare for their retirement.

This factor, coupled with the need for funds caused by the sluggish economy has resulted in more frequent distributions to taxpayers. It should be noted that sluggish economies have generally caused increases in claims nonetheless.

The following best practices may help in reducing the number and magnitude of claims involving retirement plans.

  • Knowledge and training in this specialized area
  • Consider getting a formal designation in this area
  • Proper referrals to specialists in this area
  • Engagement letter disclaimers
  • Avoid conflicts of interest
  • Disclose any compensation
  • Make sure referrals to other professionals are properly vetted and carry the correct insurance polices

War Story: A CPA from the mid-west was asked to handle a large divorce settlement for a recently divorced woman. The woman retained an investment advisor but depended on the CPA to review investments and cash flow projections. The CPA created a budget and monitored expenditures on a monthly basis. Within the first year the woman was spending lavishly and had gone through about a third of her full settlement. The CPA meet several times with the woman and advisor to get her back on track to the budget, detailed notes were taken by the CPA. Unfortunately things did not change as the woman purchased several house including one for her daughter.
The CPA continued to strongly advise the woman in writing that the draining of her assets would mean she could not live out her retirement years in the manner that she wanted or planned.

To make a long story short three years after the engagement both the CPA and advisor were sued for a breach of fiduciary duty, the attorney stated that the woman was not a sophisticated business person and relied solely on the advice of her CPA and Advisor.

The good news was the CPA had detailed notes, letters and significant correspondence to aide her in the legal defense. The bad news it cost her $25,000 (her deductible) and 100’s of hours of time to help the insurance company defend this claim.

The claim settled in her favor no damages but the legal expenses were $135,000.

What could have this CPA done differently? This best course would have been to disengage after year one citing all of the salient points for the disengagement. The lawyers believe this would have allowed them to be dismissed from the case early in the proceedings.

CPAs need to be vigilant in their training and focus on CPE that directly impacts their practice profile. If the practice consists of financial planning, senior citizen clients and or a concentrated tax practice, then retirement planning should be one of the prime CPE courses.

CPAs should refer when they lack the requisite skills. The codes of conduct require CPAs to fulfil their professional responsibilities in areas where they are competent. Any lack thereof should be examined and referral may be warranted.

Last, CPAs should strongly consider engagement letter disclaimers to elevate claims in this area.
While the engagement letter serves as a device to explain the scope of services, it can also be and should be used as a device to limit scope of service. The following disclaimer can be used:

Our services are limited to preparing your income tax returns and specifically exclude any services involving retirement plan selection and or retirement plan distributions.

While claims in this specialized area are likely to continue, the knowledgeable and risk conscientious practioner may reduce their frequency and severity.

A great resource form the AICPA: The CPA's Guide to Practical Retirement Planning