412(i) Defined Benefit Plan

There are several important benefits associated with the tax qualified status of a 412(i) plan:

Contributions to the retirement plan are considered a
business expense, so the employer receives a tax deduction.
Contributions made by the employer are not taxable to the employees at the time of investment.
Investment earnings are tax deferred.
Lump sum benefit payments may be rolled into another qualified plan,
preserving the tax deferral.

A 412(i) plan can also provide for the largest contribution and corresponding tax deduction of any retirement plan. This is because 412(i) plans are a type of defined benefit plan. Defined benefit plans promise to pay participants a specified benefit beginning at retirement and continuing over a period of time, usually for the remainder of the participant's life. Because the plan makes such a specific promise the limitations are on benefits, not contributions. (subject to certain IRS guidelines)

As a defined benefit plan the 412(i) enjoys the protection afforded by the Employee Retirement Income Security Act. Essentially, an employer may move a substantial amount of capital from the business into a tax deferred account which is protected from creditors during the period the assets are held in trust. In addition to the safety of federal law, a state may also provide statutory exemption to preserve plan funds.

The 412(i) plan is very simple, easy to implement and administer. Contributions are invested in annuities which provide the specified retirement benefits. The contracts are guaranteed by an insurance company. At retirement the benefits can be taken in cash, or as monthly income, or rolled into another qualified plan (thus preserving tax deferral).

The plan is best suited for small business and the self-employed. While opinions vary, most financial professionals consider the ideal candidate as:

Business Owner

Company

Employees

• High compensation.
• 40 to 60 years of age.
• Older than many of the employees.

• Closely held.
• Enjoys solid profits.

• Less than 10 (preferably 5 or less)
• Limited number of employees eligible to participate.

Woman Hand Gestures To Stop With A Stop Sign In Background

And this is the point which I recommend you stop and evaluate before proceeding any further. Unless you have an academic interest in the understanding of 412(i) plans, further reading will be of limited value until you resolve whether you fit the commonly accepted profile.

Please review these important questions:

    Are the business owners(s) highly compensated?

    Are the business owners(s) between 40 to 60 years of age?
                                            (or with less than 20 years to retirement)

    Are the business owners(s) older than many of the employees?

    Is the company closely held?

    Does the company enjoy solid profits?

    Are there less than 10 employees?

If you can answer yes to these questions then we may have a basis for moving forward. As an independent, Crown Financial Services is not limited to presenting just one company, but can freely provide you with the resources you need to make a sound, confident decision. If you answered yes, then Contact Us Today!

How The 412(i) Plan Works

Implementation

412(i) plans are simple to implement. Essentially,

A census is completed.
The census is submitted for proposal.
A proposal presentation is reviewed with the decision maker(s).
If the proposal is acceptable, the employer adopts the plan and trust.
Applications are submitted for the annuity and life insurance.

Administration

Another one of the advantages of the 412(i) is the simplicity of administration. Since the plan is based exclusively on insurance contracts it doesn't require the use of an enrolled actuary, nor is it subject to the minimum funding requirements of other retirement plans. Because of this, not only is administration simpler, but typically less expensive than for a traditional defined benefit plan.

Funding

412(i) plans are funded with an annuity and may also include life insurance. Individual or group may be used. Fixed insurance products are guaranteed by the insurance company to provide a certain amount at a specified time, thereby protecting participants from negative market swings and poor investment choices.

The contracts must remain in force. Funding is expected on the first day of each plan year. Because the contributions are based solely on the guaranteed provision of the contracts, there's no over funding or under funding. Forfeitures, investment earnings from dividends, interest and capital appreciation decrease the contribution in the following year. Premiums are level, begin when a participant enters the plan and may extend no later than the specified retirement date.

Participation

Participation must be available to all eligible employees, however, equal access does not automatically provide equal benefits. While the method for determining benefits is universally applied, the result is typically oriented relative to the level of a person's pay. For example: if the benefit for each person is based on a percentage of income, the benefits will be greater for those people who earn a higher salary.

Flexibility

412(i) plans have flexibility to meet changing needs. Some options include:

Terminating the plan and distributing the cash values.
Restating to a traditional defined benefit plan with no life insurance. The same contribution arrangement may continue, but the amount may be reduced or even eliminated.
Restating to a Split-Funded Plan, (a traditional defined benefit plan that also provides life insurance). The same contribution arrangement may continue, but the amount may be reduced or even eliminated.

Life Insurance

The amount of life insurance allowed in a 412(i) plan is limited. Further, the participant is taxed on the economic benefit of the protection. The economic benefit is the cost of the life insurance protection which is being provided for the participant. The Internal Revenue Service considers this taxable as income. For an excellent website on whole life insurance, click Here. Or, for universal life insurance, click Here.

Life Insurance Disbursement

At retirement or upon plan termination several options are available for the life insurance:

The insurance may be converted to an annuity.
The policy may be distributed to the policyholder. This is considered taxable as income by the Internal Revenue Service. Often the fair market value is determined by the cash surrender value.
The policyholder may purchase the policy using funds not associated with the 412(i) benefit plan.
Alternatively, with proper planning, a participant may establish an Irrevocable Life Trust for the purposes of estate planning. The Trust would purchase the policy for the fair market value using funds not associated with the 412(i) benefit plan. Upon death of the insured the proceeds may then pass free of income, estate and gift taxes.

Benefit Summary

Contributions to the retirement plan are considered a business expense, so the employer receives a tax deduction.

The 412(i) provides for the largest contribution and corresponding tax deduction of any retirement plan.

Contributions made by the employer are not taxable to the employees at the time of investment.

Investment earnings are tax deferred.

Lump sum benefit payments may be rolled into another qualified plan, preserving the tax deferral.

Lump sum benefit payments may be eligible for income tax averaging.

Provides the highest level of benefit security for individual participants, a guaranteed benefit at retirement.

Plan assets are protected from creditors.

May provide substantial death benefits, guaranteed and free from federal income taxes.

Easy plan administration, doesn't require the use of an enrolled actuary, nor is it subject to the minimum funding requirements of other retirement plans.

Disadvantages

Though an insurance company may credit prevailing interest rates or a portion thereof, the return based on the guaranteed minimum interest rate is typically substantially lower than can be achieved through other investment products. Quite often the guaranteed rate is only 3 or 4 percent.

Little flexability, plan funding is expected on the first day of each plan year.

Because the policies must remain in force, the employer faces an annual funding obligation, regardless of company earnings.

The contract's cash value may not be used as collateral, nor are loans permitted.

The General Agreement On Tariffs And Trade Treaty limits lump sum distributions.

Your Name
Title
Company Name
Address

City
	State Zip
Telephone
Best Time To Call
Email
Date the business began?	month-day-year
Is the business incorporated?	if not, what type?
Date the fiscal year ends...	month-day-year
Date plan to be effective...	month-day-year
Annual contribution goal...	fixed or percentage
Comments

... and your done!