To maximize the available benefits of a 412(i) plan, an option to purchase life insurance under the plan may provide up to one half of the plan retirement benefits. The guaranteed cash values and guaranteed premiums of The Pension Professionals suggested whole life insurance contracts are ideal for funding such a "fully insured" plan.
Life insurance in all qualified retirement plans must comply with the "incidental insurance" rules discussed in Treasury Reg. Section 1.401 (b)(1)(i). These provisions place a limit on the amount of life insurance that may be purchased under the plan. Generally, a defined benefit plan can provide no more than 100 times the projected monthly retirement income as a pre-retirement survivor benefit. An alternative provision under Rev. Rul. 74-307 instead allows up to one half of the level premium to be used to purchase life insurance contracts within a defined benefit plan.
While life insurance does not need to be offered under a 412(i) plan, this feature does provide important additional benefits for a participant. If there is an insurance need, the participants may obtain the benefits of life insurance on a pre-tax basis. For highly profitable, closely held businesses, there often exists a substantial insurance need for the owner. A "fully insured" plan cannot only maximize the current deductions, but can also meet these needs by funding the benefit with life insurance contracts.
When life insurance is included inside a pension plan, the participants must recognize as a taxable cost the "current economic benefit" provided by the plan (IRC Section 72(m)3(B), Reg. Section 1.72-16(b)). Each participant is then taxed currently on the cost of the "pure" life insurance benefit. The cost of this current benefit is known as the P.S.58 cost. The cost is determined by using the one-year term rates published in Rev. Rul. 55-747. if, however, the insurance company's one-year term rates are lower, the participant may use the insurer's lower rate to determine the amount to be included in gross income (Rev. Rul.66-110, 1966-1 CB 12).
The Pension Professionals can provide policies with very competitive one-year term rates. For example, the initial year's taxable income for a $1,000,000 face amount for a 50-year-old is:
Using the Government's P.S.58 Rates $9,220
Using WPS suggested Taxable Term Rates $1,020
Defined Contribution plans, especially 401(k) plans, have enjoyed tremendous popularity over the past 10 years. Now some employers are shifting toward defined benefit pension plans that deliver guaranteed benefits and large tax deductions.
Successful small business owners and professionals are expressing renewed interest in insured fully guaranteed defined benefit plans to assure enough money is set aside at retirement.
Recent pension legislation now encourages this rebirth, permitting much higher tax deductions than defined contribution or 401 (k) plans. And, in the year 2002, employers will no longer be restricted in what they can contribute to a Defined Benefit Plan due to participation in a prior Defined Contribution Plan.
Age-based plans like Age Weighted or Select pension or profit sharing plans work well in shifting the majority of the plan contribution in favor of the older business owner. But the problem with these plans is that they are capped at the $40,000 contribution limit.
The Solution: Fully Insured Defined Benefit Plans
As you can see from the figures on the reverse side, plan deductions can be significantly higher than any other plan type. It is possible to generate deductions well over $100,000 annually. Maximum insurance amounts can reach up to $3,000,000!
Add to this the other advantages of a fully insured plan:
* Easy to explain - plan provides a specified retirement benefit which is fully guaranteed.*
* Easy to understand "accrued benefits" equal to the cash value of the life insurance and annuity contracts.
*Guarantees are dependent upon the claims paying ability of the issuer.
A 412(i) plan is simple and may perhaps be the ideal plan for the owner of a small business or professional enterprise who desires to maximize his or her current tax deduction and secure guaranteed retirement income. The contributions are, by design, quite large in the early years of the plan and may be less appealing as the number of plan participants increases. Introducing life insurance to fund a portion of the benefit will provide increased initial contributions and a current pre-tax life insurance benefit for each participant.
The Pension Professionals provides "fully insured" plans that are unique tax reduction tools for today's small business owner.