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412
(i)
Fully Insured
Plan
What
Is a 412(i) Plan
A defined benefit
pension plan is a pension plan that guarantees
a specific
retirement benefit. Instead of contributing a specified amount for
each participant (defined contribution plan), the employer contributes
whatever amount is necessary to fund this guaranteed
retirement benefit. This requires a larger contribution for older,
higher paid, participants.
The
412 (i) plan, is a qualified defined benefit plan that allows for
tax deductible contributions. The plan is funded with a combination
of life insurance and annuity products as required by IRS regulations.
Compared to
a traditional defined benefit plan, a 412 (i) plan will produce:
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Larger initial deductions.
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More stability in the contribution level.
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Simpler plan administration, and a secure promise
of future plan benefits based upon the guarantees in the life
insurance policy. |
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Why
are 412(i) plans now gaining popularity?
Although defined contribution
plans, such as 401(k) plans are popular, contributions to these
plans are very limited. Limited contribution levels and uncertainty
of stock markets, can mean that the accumulated funds would be insufficient
to cover retirement. Especially since retirement may span 20 or
30 years, or even longer.
Recent changes
in the tax code have made the 412(i) plan extremely beneficial to
business owners. The annual actuarial plan certification was repealed.
Now the actuarial calculations are provided by the insurance company
offering the 412(i) investment products. In addition to the cost
savings of the actuarial certification, the repeal also allows for
greater pre tax funding contributions that significantly exceed
other qualified plans contribution amounts.
How
does the deductible amount in a 412(i) plan compare to a traditional
Defined Benefit Plan?
Generally, a plan funded with annuity contracts Double
the deductions allowed under a traditional plan. A plan funded with
both annuity and the maximum life insurance may Triple
the deduction allowed in a traditional defined benefit plan. All
employer contributions required to fund benefits are fully deductible.
Earnings from the plan accumulate tax
deferred. If life insurance is used to fund any of the benefits,
a relatively small amount of income must be recognized each year
by each participant covered by life insurance. The amount is known
as the “economic benefit”. Other than this, there is
no tax incurred by
participants until retirement, when the benefits become subject
to taxation.
Who
is covered?
Employers must offer participation to all full time employees
who are over age 21 and are US citizens. Waiting periods, vesting
schedules and benefits accrual formulas can be used to make sure
the plan rewards those employees who are most valued.
Summary
A 412(i) plan guarantees retirement benefits. It usually allows
significantly higher tax deductible contributions than other types
of retirement plans. Also a 412(i) plan can be structured to favor
older, more highly compensated employees. See also Q. 3 Insights
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