I have been reading a great deal of information about the 412(i). I think some of the information being communicated is accurate; some very misleading. Let's look at what's being said about how and where to use the 412(i) Plan.
A 412(i) is a defined benefit plan that uses a life insurance annuity table and assumptions. This plan provides a substantially higher tax deduction with a much simpler method of calculating contributions and benefits by using a different actuarial funding strategy.
412(i) Plans have been around for more than 50 years.
412(i) plans guarantee a return of four percent (in some cases three percent). When interest were 8-14% or more, a four percent product was not very exciting. However, today's low interest climate, coupled with market disenchantment, lends strong appeal to a guaranteed investment return. Further, the tax-deductible contribution for one person can be as high as $350,000 or up to 100% of wages.
No, not at all. a 412i plan is for people who would like to postpone taxes.
Let me speak of four cases I've been involved in:
Case #1All of the examples suggest that there is no non-owner employees. Why is that?
I proposed a 412(i) plan for a 52 year-old, the contribution was $265,000. He had a 55 year-old employee earning $20,000. The 412(i) contribution for the employee was $32,000.
The cost for employees can be extraordinarily high. I have been reading articles that suggest an employee group should not exceed 10 people. I couldn't disagree more. There are a few times that it is appropriate. A careful comparison between a standard defined benefit plan and a 412(i) defined benefit plan should be drawn and reviewed at any time that there are non-owner employees.
The pension law, as it applies to defined benefit plans states that you cannot exceed a maximum amount of cash at "normal retirement age". The 412(i) exceeds that limit.
The plan administrator should be aware of when the maximums permitted is approaching and convert the plan to another type of plan, i.e. a profit sharing plan.
Many of our clients who are contemplating a 412(i) plan like the idea of tax deductions as it applies to the purchase of life insurance. We have used 60 to 65 percent of the annuity contribution as the premium to fund the life insurance policy.
Therefore if a 40 year-old has a 412(i) contribution of 100,000, we suggest a life insurance premium of $60,000. This may increase the deductible contribution as well as providing a much need benefit for the client.
With these kinds of numbers we can see why the insurance industry is so excited about the 412(i). With the size of the deduction we can also see why the buying public is interested.
412(i) does not apply in every case, but when it does, the agent and the client have provided, for each, a small economic miracle.