In light of recent proposed guidance from the Internal Revenue Service on 412i plans, advisors may be wondering whether they should consider 419A(f)(6) plans for certain clients.
Section 419A(f)(6) permits employers to provide welfare benefits (death, severance, disability income, long term care, etc) in an employee benefit program where 10 or more employers opt into a compliant plan. These assets are owned by the trustee for the benefit of the participants. Employers’ annual contributions are based on the amount needed to pay for the benefits and are income tax deductible so long as the benefits are reasonable. Since the benefits typically are designed to be paid upon the occurrence of certain triggering events that are beyond the participants’ control, these benefits are not subject to the qualified plan rules.
These welfare benefit plans are not designed for retirement benefits, whereas 412i plans are.
A 412i plan is a qualified defined benefit pension plan funded exclusively by either life insurance or annuity contracts or a combination. 412i plans must satisfy certain criteria in order to be exempted from the complex funding rules that apply to traditional defined benefit plans. There has been a significant difference of opinion over the amount of life insurance and type of product which could be placed into a 412i plan without running afoul of the Code and IRS guidance.
An employer may sponsor both welfare benefits and retirement benefits concurrently, i.e. 419A(f)(6) and 412i plans.
While 412i plans still are viable when properly designed, advisors should look seriously at the 419A(f)(6) market, conduct their own due diligence and work with a plan sponsor and carrier that will not abandon them in these challenging times. This is easier said than done.
Here are some questions to pose:
–Has the 419 plan ever been audited and did these audits result in material changes?
–What is the size of the plan and how long has it been in existence?
–Has the plan sponsor rescued other now-defunct 419 plans?
–Has a national reputable law firm reviewed and provided a comprehensive more likely than not opinion on the sanctity of the plan and all its components?