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December 07, 2002 at 07:00 PM
412(i) Pension Plans Maximize Tax Deductions
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A very hot topic in the industry right now is the 412(i) qualified retirement plan. The reason is, these plans are providing huge tax deductions and huge qualified plan contributions for business owners, while generating very large commissions to agents.
Whats behind the buzz is the subject of this article. Before exploring that, however, lets review what 412(i) plans are and are not.
A 412(i) plan is a defined benefit qualified retirement plan. It is based on section 412(i) of the Internal Revenue Code. The plan must be funded with insurance contracts that are guaranteed by an insurance company.
While such plans are subject to the normal rules of other defined benefit plans, the contributions for older employees can be considerably higher than allowed for in traditional defined benefit plans. This is because the benefits can be funded using the guaranteed interest rates of life and annuity contracts.
The plan participants must make contributions to their 412(i) plans each year–because the life insurance contracts must have level annual premiums.
Now, for what 412(i) plans are not: They are not 419 plans or VEBA (Voluntary Employment Beneficiary Associations) plans, both of which have come under IRS scrutiny.
Who is a potential 412(i) client? In general, small businesses with seven or fewer employees are best suited for these plans, with one- or two- person businesses being ideal. Excellent prospects are high-earning small business owners, doctors and real estate agents who have relatively stable earnings.
Note: Mid-size businesses can benefit from the plans, too. However, the plans are not as attractive for them because contributions to such plans must be made for all employees.
412(i) plans have been around for 40 years, but they fell out of favor when the 1990s bull stock market made defined contribution plans look more attractive, due to the high investment returns they were yielding at the time.
Todays uncertain economy has brought 412(i) plans back into favor, however, and they are now more popular than ever. The benefits they offer–of no risk of principal and guaranteed, secure values–are exactly what business owners are looking for right now.
Whats more, the Economic Growth and Tax Relief Reconciliation Act of 2001 has created the potential for even higher contributions and deductions in all defined benefits plans, including the 412(i) plans. This, too, has helped to make these plans more attractive than ever.
