What is a 412(i) Plan?
   
  1. What is a 412(i) plan?

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    1. A 412(i) plan is a defined benefit pension plan that is fully funded using insurance contracts.

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      1. Traditional defined benefit pension plans are normally funded using actuarial assumptions that must be "reasonable", as set forth in IRC Section 412. Plans that meet the requirement of IRC Section 412(i) are exempt from these complex funding requirements.

       

    2. The only difference from a traditional defined benefit pension plan is the method of funding. The plan must meet all coverage, non-discrimination, benefit limit and incidental death benefit requirements.

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      1. Coverage Requirement: the plan may not be for the exclusive benefit of highly compensated employees. In addition, the plan must cover the lesser of 50 employees or 40% of the workforce.

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      2. Non–discrimination Requirement: the plan may not discriminate in favor of highly compensated employees in the provision of benefits, rights or features of the plan.

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      3. Benefit Limit Requirement: IRC Section 415 sets forth the limit on the amount of benefit an individual may accrue under a plan. The limit is currently the lesser of 100% of average compensation or an annual life annuity of $160,000.

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      4. Incidental Death Benefit Requirement: the plan may not provide a death benefit to the participant’s beneficiary of greater that 100 times the monthly benefit at normal retirement age, or the amount determined under Rev. Rul. 74-307.

     
  2. What are the requirements of a 412(i) plan?
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    1. The plan must be funded with annuity contracts or a combination of insurance and annuity contracts.

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    2. The contracts must provide for level annual premium payments, with dividends used to reduce future premiums.

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    3. The plan benefit must be guaranteed by an insurance carrier to the extent premiums have been paid. There is an exception for top heavy minimum benefits.

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    4. Premiums for current and all previous years must have been paid before lapse or there is a reinstatement of the policy.

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    5. No rights under the contract may be subject to a security interest during the plan year.

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    6. No policy loan may be outstanding at any time during the plan year.
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  3. Why choose a 412(i) plan?

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    1. The plan is not subject to the full funding or current liability test that may limit the deduction in a non-fully insured defined benefit pension plan.

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    2. The plan is funded on a level and predictable basis, which makes it easier to understand than a traditional defined benefit pension plan.

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    3. There is no need for an enrolled actuary, since a Schedule B in not required. There is an exception when there is a "top heavy" accumulation fund.

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    4. Much larger contributions are available in a 412(i) plan, as compared to a traditional defined benefit pension plan. This may allow the employer to fully fund benefits more quickly.

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    5. The benefits are guaranteed by the insurance company.

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      1. The insurance company bears the investment risk.

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      2. The investments are not influenced by market fluctuations.

       

    6. Plan assumptions should not be subject by the IRS since the assumptions are mandated to the guarantees in the insurance company contracts.
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  4. What are the disadvantages of a 412(i) plan?

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    1. There is no flexibility in investments; as the assets must be held by an insurance company. In addition, variable products generally will not work since they are typically not funded on a level annual premium basis.

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    2. Premiums must be paid as they come due. This means that there is little to no flexibility in the timing of contributions.

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    3. No policy or participant loans are permitted.

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    4. Premiums are determined by insurance company product rates; therefore, there is no flexibility in costs.

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    5. The plan may become "overfunded" if lump sum payments are intended and the guaranteed amount under the contract exceeds the IRC Section 415 maximum for the participant. However, this can be avoided with proper selection of the contracts used to fund the plan.

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    6. The plan may also be "overfunded" if the plan is funded with life insurance and the face amount of the insurance exceeds the maximum permissible death benefit.

     
  5. Which Clients are the best candidates for 412(i) plans?

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    1. The "ideal business" is a closely held business with one or two owners with relatively few employees.

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    2. The demographics should be:

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      1. Owner – highly paid, aged 40 or older

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      2. Employees – Few to none, low paid and younger than the owner

       

    3. The business owner should be interested in maximizing the tax deduction for contributions to the plan and have stable income for the next 5 to 10 years.

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    4. Investment flexibility is not important to the owner.

412(i) Defined Benefit Pension Plan Request for Plan Study

Employer Name:

City/ State/Zip

Phone:

Plan Effective Date:

Insurance Company:

 

Is the employer interested in purchasing life insurance within a qualified plan environment?

( ) Yes  ( ) No

Does the employer currently sponsor any other qualified plans (401(k), SEP, SIMPLE, Defined Benefit)?

( ) Yes  ( ) No

If yes, please provide the plan provisions or a copy of the plan document.

 

What is the amount of annual contribution that the employer is targeting?

( ) maximum

( ) $_______including employees and owner

( ) $_______for owner

Does the employer want to provide a monthly benefit at normal retirement age, as opposed to providing for a lump sum payment?

( ) Yes ( ) No

Note: A lump sum payment will not be available in most 412(i) arrangements, other than de minimis amounts paid to terminated participants.

Is the employer also interested in a traditional defined benefit pension plan?

( ) Yes  ( ) No

Note: Life insurance is also permissible within a traditional defined benefit pension plan as long as the coverage is incidental. For a Defined Benefit Plan, life insurance coverage is generally considered incidental, as required under Treas Reg 1.401-(b)(1), if the amount of the life insurance does not exceed 100 times the participant's projected monthly benefit.

This 412(i) illustration is being requested by:

 

Name:

Firm:

Phone:

Fax:

Email:

 

Instructions:

Please complete the following information for each request:

     

  • 412(i) Defined Benefit Pension Plan Request for Plan Study and Analysis

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  • Census Information Form

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  • Sponsor Information Form

Please forward the completed information to:

Don Stark
Loren D. Stark Company, Inc.
10750 Rockley Rd.
Houston, TX 77099
Phone: 281-498-5777
Fax: 281-879-1204
Email: ldsco@ldsco.com