Help Your Clients Other Advisors Understand 412(i) Plans
Financial advisors should take a leadership role in coordinating their small business owner clients planning team, which typically includes the owners attorney and CPA. Financial advisors add significant value by understanding and helping explain the planning opportunities to their clients other advisors.
Partnering with an advanced sales department from an insurance company may be especially helpful in this process. After all, an advanced sales department typically is staffed with attorneys, CPAs and other financial service professionals. While advanced sales consultants do not actually advise the client, they help producers understand the technical issues involved in their cases and help educate the clients CPA and attorney. This may help eliminate confusion for the business owner and help everyone understand the plan and how the products fit into the plan.
For example, an advanced planning technique gaining in popularity is the 412(i) plan. Many small business owners may have been contacted about 412(i) plans. Financial advisors should take the opportunity to explain the 412(i) concept to the small business owner and his or her advisors, and to explain how the insurance products fit.
A 412(i) plan is a fully insured defined benefit plan. It defines a benefit for the participants and requires contributions sufficient to fund those benefits. Typically, a 412(i) plan is funded with a combination of fixed annuity and fixed life insurance contracts. This permits the employer/plan sponsor to shift the risk of investment to the insurance company. Consequently, such plans are exempt from qualified plan minimum funding rules.
However, 412(i) plans are not exempt from any other rules pertaining to defined benefit pension plans and, therefore, must comply with all other qualified plan rules and regulations. For example, the plan must be implemented for all eligible employees. The business owner cannot pick and choose the participants.
The 412(i) rules require:
Funding exclusively by the purchase of individual insurance contracts. The definition “life insurance contracts” includes life insurance policies and/or annuities. Group policies with the characteristics of individual policies as determined by the Treasury are treated as individual insurance contracts;
Funding by insurance contracts that are level premium from the time a plan participant begins participation in the plan until that participants normal retirement age;
Use of the contracts guarantees in establishing contribution levels. Earnings in excess of the level guaranteed must be used to reduce future contributions to fund plan benefits. The contract guarantees are subject to the claims-paying ability of the issuing insurance company;
Contracts that provide policy benefits equal to the benefits provided by the section 412(i) plan;
Premiums for a plan year must be paid before the contract/policy lapses; and,