A 412(i) Plan is a retirement plan which allows clients to generate large tax deductible contributions, enjoy steady, tax-free earnings, while minimizing the amount of contributions that must be allocated to the employees.
Under the Internal Revenue Code, a Section 412(i) Plan is a defined benefit retirement program that is, as required by law, funded with life insurance and annuity contracts. Section 412(i) allows current contributions to be calculated using the guaranteed cash values and annuity purchase rates of life insurance products. This allows a taxpayer to fund contributions on a tax deductible basis in amounts greater than are typically allowed for other qualified plans.
In addition, under regulations promulgated under Section 401(a)(4), “cross testing” of benefits among plan participants allows taxpayers to effectively skew the benefits in the client’s favor, as the requirements allow the benefits, rather than the amounts contributed to the plan, to be the relevant benchmark in ensuring that discrimination rules are not violated.
How It Works
Because situations differ, each 412(i) Plan must be customized to meet your specific objectives. Following, however, are the major steps in establishing and implementing these strategies.
Determining the proper structure is the first crucial element to a successful 412(i) Plan. While one typically wants to maximize tax deductibility, a host of variables must be analyzed in order to ensure tax compliance while accommodating other goals. These variables include age and health status, company structure(s), income levels of proposed plan participants, number and roles of employees, existence of other qualified plans, post-retirement goals, current and future income needs, among other issues.
As with any other qualified plan, the 412(i) Plan must adhere to plan participation and anti-discrimination requirements. Therefore, in order to ensure that one can maximize the amount of contributions, several planning options may be employed.
These may include such tactics as
- imposing vesting requirements for employees;
- establishing nonaffiliated entities from a pension plan perspective from which the plan is funded;
- excluding employees based on the existence of other qualified plans;
- and other techniques.
Once the proper structure is determined, a retirement plan is established and submitted to the IRS for approval on its tax deductible and tax exempt status. Meanwhile, plan contributions begin with the contributions going towards the funding of a combination of interest sensitive whole life insurance and annuity products.