Traditional vs. Non-Traditional Targets For Selling 412(i) Plans
When most producers think of a prospect for a 412(i) plan, they envision a professional between the ages of 40 and 70 (or within 10 years of retirement) who owns a small business. This business owner has created a profitable company that requires few employees, or preferably, none at all.
Typical prospects for a 412(i) plan include doctors or lawyers. For example, a general practitioner who sees patients at his office generally retains a small staffone or two nurses, technicians, a receptionist and a bookkeeper. This individual is a good prospect, but producers often overlook other doctors who are better targets for 412(i) plans. These doctors work as independent contractors for a hospital and may have no staff. They include radiologists, anesthesiologists and some cardiologists.
All 412(i) prospects should be business owners with few or no employees. There are 2 key reasons for this. First, 412(i) plans can be expensive for employees, particularly those who are older and highly paid. Second, this type of plan allows participants to save a substantial amount of money in a short period of time.
Financial advisors are drawn to the “usual” practice-oriented professionals as candidates for 412(i) plans. What few realize is that many other people could potentially qualify and benefit from this type of plan. These “outside the box” prospects are businesses that appear to have too many employees.
Upon closer evaluation, however, many of these employees are actually “free exclusions.” The term refers to employees who can be excluded from a 412(i) plan and from the plan?s coverage and participation tests. The employees fall into the following categories:
? Independent contractors. Because independent contractors own their businesses they are not employees of the companies that use their services. Consequently, a business owner who has hired independent contractors does not need to include them in the company’s 412(i) plan.
? Union employees. A business owner is not required to include union employees in a retirement plan so long as the union employees’ retirement benefits have been the subject of good faith bargaining. Frequently, a union will bargain for its employees and exchange a retirement planlike 412(i)for other benefits, including promotions or an enhanced 401(k) plan.
A construction company could find itself in this situation. Construction companies retain a large number of employees, nearly all of whom belong to a union. After excluding the union workers from the construction company’s 412(i) plan, the company will be left with only the owner and perhaps a bookkeeper.
? Part-time employees. In most cases, business owners can exclude part-time employeesthose working less than 1,000 hours in a 12-month periodfrom a 412(i) plan. For example, individuals who work part time at a convenience store or a neighborhood pharmacy would not be eligible for the employer’s 412(i) plan.
One financial advisor with whom I?ve worked has crop farmers as clients. Crop farmers need a large number of employees who work only seasonally and less than the required 1,000 hours.
In addition, many of the employees do not return year after year. The financial advisor I mentioned conducts seminars at farming cooperatives and always includes 412(i) plans in presentations.
For these clients, as well as those who fall into the conventional prospect category, 412(i) plans can be quite attractive. Since they are qualified retirement plans, every dollar of the plan contributions is tax deductible to the business. These tax deductions can be quite substantial.
Is everyone a candidate for a 412(i) plan? The answer is no. The 412(i) plan market is considered a “niche market,” but it is important to remember that the 412(i) niche is much larger than most people think.
, CPC, is a case design specialist with Shadow Advisors, a division of the advanced planning and professional services department at Guardian Life Insurance Company of America. Her e-mail is: [email protected].
Reproduced from National Underwriter Edition, June 11, 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.