412(i) Plans Have Allure For Eligible Boomers

Because a 412(i) is a pension plan, subject to ERISA, it cant discriminate in favor of highly paid executives, “so if you have a lot of older employees, it may not work,” he says.

Although a 412(i) offers big tax deductions, Transamerica doesnt sell it on that basis alone, says Oliver. The company wants its agents to emphasize to clients that it builds a guaranteed retirement income that at some point they can roll over to an IRA or profit-sharing plan.

Agents should look for opportunities to sell it year round, not just as a year-end tax strategy, Oliver says. “You dont have to fund it till you file a tax return, so clients even today [in March] can go ahead and get it started,” he points out.

In fact, right now, when many are still feeling the pain of filing their annual income tax return, clients may be most receptive to the advantages of a 412(i), he notes.

A lot of producers already have the prospects who could fit well with a 412(i), he adds.

“Many of your small business clients may be too small for a 401(k), or if youve gone in to a client who is dealing with buy-sell planning for his business, the 412(i) could be a good fit,” he says.

Oliver warns the product is inappropriate for businesses with more than a few dozen employees. And the client must be willing to commit to making the future contributions, which means his business needs to be doing well enough to meet that obligation for, say, 5 to 10 years in the future.

Dont forget, too, that the IRS is watching for plans designed primarily as a tax strategy, such as those with artificially depressed surrender values for the life insurance portion, Oliver warns.

Bruce Temkin, a consulting actuary with Matthews Benefit Group, St. Petersburg, Fla., says people should put money away while they are making it. Thats the good thing about 412(i)s, he points out. It lets them put a lot of money away.

“How many people are assured that 10 years from now, they will have a comfortable income coming in?” he asks. “Job security is a thing of the past” for many people.

Still, Temkin says he has serious concerns about the way the plans are sometimes sold. “Many advisors could be unaware that should a 412(i) be terminated early, the employer is subject to the same lump-sum distribution rules as in any traditional defined benefit plan.”

This means an individual might be subject to a significant reversion of assets in the fund, which would be taxed at nondeductible 50% excise tax.

To avoid such problems, advisors need to devise exit strategies people might use so they can terminate the plan without penalty, he advises.

Reproduced from National Underwriter Life & Health/Financial Services Edition, March 19, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.