Your 412(i) Source

Defined Benefit Plans such as the 412(i) plan have been around for a long time, but have only recently been given the ability to provide large tax savings and investment opportunities.

Q: What is a 412(i) Plus plan, in simple terms?

A: A 412(i) plan is a retirement plan. Have you heard of a 401(k) plan, a 403(b) plan or a 457 plan? Those are retirement plans. The numbers refer to a section of the Tax Code that authorizes the kind of plan. 412(i) is one of the retirement plans authorized by the Tax Code. The 412(i) is a kind of plan called a “defined benefit” plan. That is different from the 401(k) or 403(b) plans which are called “defined contribution” plans. The difference is that with a defined contribution plan, you decide what percentage of your income you can put in the plan each year. The defined benefit plan is supposed to guarantee that you have a specified amount of money by the time you reach retirement age. The amount you contribute to a defined benefit plan each year depends on how much progress has been made toward that retirement goal and how much time is left to your retirement date. Defined benefit plans generally allow an employee to save a lot more each year toward retirement than they can save with a defined contribution plan. For instance, the most money you can put into any kind of defined contribution plan in 2002 is $40,000. With a defined benefit plan you can put away much, much more. With a 412(i) Plus plan, you can potentially put away as much as $300,000 in a year.

Q: Why haven’t I heard of these before now?

A: 412(i) plans have been part of tax law and retirement law for decades. The reason they aren’t well known is that until now, they didn’t offer competitive investment returns. They have always provided potentially large tax deductible contributions. But, business owners would often decide to pay their income taxes and invest what’s left instead of settling for 4% or 5% returns.

Q: How much can I save each year in a 412(i) Plus plan?

A: The amount you can put into the plan each year depends on several factors: When do you want to retire? How old are you? What is your annual salary? What percentage of your pre-retirement salary do you want to receive from your 412(i) Plus plan when you retire? The maximum possible contribution to a 412(i) Plus plan would be for someone over age 40, earning $200,000 or more per year. The highest possible contributions are about $350,000 per year. Once the maximum contribution is determined by our actuarial staff, any amount below that is a possible contribution.

Q: What kind of companies use 412(i) Plus plans?

A: The best fit for 412(i) Plus plans are companies where highly compensated employees (those making over $80,000 per year) represent at least 15% of the total workforce. If a company has a lot of lower-compensated employees, the cost of providing the retirement plan for those employees becomes too expensive compared to the tax benefits the highly compensated owner/employee gains by using the plan.

Q: Can I use a 412(i) Plus plan for myself and give a less costly plan to my employees?

A: No. That constitutes discrimination under ERISA regulations. ERISA is the federal law that governs retirement and benefit plans. It is illegal to discriminate in ERISA retirement plans.

Q: How can I tell whether a 412(i) Plus plan will work for me and my company?

A: Email us Phillips and Associates and request a 412(i) input package. Once you provide us your basic company information, we’ll give you a no-cost, no-obligation proposal to let you see just what a 412(i) Plus plan might do for you and your employees.

Q: What other benefits does the 412(i) Plus plan offer besides the chance to save bigger amounts each year?

A: For those people who have a need for life insurance, the 412(i) Plus plan can hold life insurance. By paying for your life insurance through your retirement plan, your life insurance premiums become tax deductible. Other than the 412(i) Plus plan, there are very few ways to legally deduct the cost of life insurance. For individuals who need large insurance policies as protection for their families or for estate planning purposes, the 412(i) cuts the cost of that insurance by as much as 66% because of the tax advantages.

Q: I already have a retirement plan, but I’m still getting hit hard with income taxes each year. Is the 412(i) Plus plan a possible solution?

A: Yes it is. The first step is to submit a company census to determine what the 412(i) Plus plan can do for you and your company. If the 412(i) Plus plan doesn’t work, there are other possibilities. A welfare benefit plan might be appropriate. Visit www.vebasource.com for more information.

Q: Can I have a 412(i) Plus plan along with another retirement plan?

A: Generally the answer is no. But there are situations where the answer can be yes. If you are an owner in more than one company, sometimes the law will permit you to have two plans. It takes a review by a pension planner to determine whether it can work.