A 412(i) Plan is a tax-qualified benefit plan designed for small business owners, funded by life insurance or other guaranteed annuities.
412(i) Plan Details
Defined as a qualified benefit plan under section 412(i) of the Internal Revenue Service (IRS) code, the 412(i) Plan is a custom-designed prototype that can be assimilated into any investment-grade annuity or life insurance contract. Any amounts contributed by the employer or business owner are tax-deductible for the company, and a Plan must meet the usual nondiscriminatory coverage rules imposed on qualified retirement plans.
Also known as fully insured defined benefit plans, 412(i) Plans rely on the insurance contractors' guarantee to fund benefits upon the contributor's retirement. While the plan's growth is tax-deferred, distributions to participants or beneficiaries are subject to income tax.
A fully insured 412(i) plan offers retirement investment simplicity plus significant tax-deductible and insurance-guaranteed retirement benefits provided by an insurer. In 1974 the IRS developed these plans for small and medium enterprises where employers may have difficulty contributing to invest in their business while funding their employee's retirement benefits.
412(i) plans require large premiums that make it unsuitable for small start-ups but more ideal for businesses that have been established and are profitable. Life insurance for this defined benefit plan reduces premiums and guarantee maximum benefit returns. Over time, gains for the 412(i) plan will increase, essentially lowering the premium costs instead of traditionally defined plans that tend to keep increasing.
Examples of a 412(i) Plan
Business owners who would like to benefit from generous tax deductions towards their employees' retirement contributions can take advantage of the 412(i) Plan. It'sIt's also suited to sole business operators who want a sizeable contribution to their retirement and have the cash flow to maintain the plan over the remaining years. A 412(i) Plan can also work for business owners with no more than 15 employees and is a flexible retirement plan that business owners can customize to fit any situation.
If a self-employed business owner is looking for return guarantees or income tax deduction and can contribute over $40,000 annually, they can take advantage of a 412(i) Plan. High-earning business owners 50 years or older can benefit from the participation, vesting, and nondiscriminatory rules typical to retirement plans. Businesses with less than ten employees will benefit the most from 412(i) Plans since more employees will increase the total contribution amounts, which can potentially hinder retirement goals.
This plan provides returns on retirement. The calculated contributions depend on how many years are left to attain that goal. With a 412(i) Plan, individuals can plan for up to $160,000 in annual income after retirement, and an enrolled actuary can personalize its design to meet these goals better.
Significance of the 412(i) Plan
While defined contribution plans like the 401(k) have been popular throughout the last decade, some employers shift towards plans that deliver huge tax deductions and can guarantee benefits. The 412(i) Plan is one such fully guaranteed and insured defined benefit plan, and recent legislation has a spiked interest with higher tax deductions than prior contribution plans.
Since 2002, employers aren't restricted to the amount they can contribute to the 412(i), eliminating the $40,000 contribution cap in other age-based plans. This is also a retirement investment; it shifts the risk to the insurance company from the contributor or an employer. The guaranteed positive rate of return is relatively low, but the tradeoff lacks risk from investing in markets or loss of principal.
With a fully insured 412(i) Plan, a small business owner or employee can reap substantial incentives through a secure and simplified program. Apart from significant tax deductions for the contributions, other plan benefits will include;
- No current test limits liability contributions or funding limitations under ERISA or the Employee Retirement and Income Security Act of 1974.
- No over or underfunding as contributions are based on the level of premium contacts in the plan's guaranteed provisions.
- There'sThere's no need for actuarial certification to set up or maintain a 412(i) Plan
- IRS-approved prototype provides substantial administrative cost savings.
- Can be funded annually without paying interest, unlike requirements for quarterly contributions in traditionally defined benefit plans
- Higher deductions are permitted as contract guaranteed, meaning IRS can't challenge plan assumptions.
One downside of the 421(i) Plan is its unsuitability to some businesses and situations due to the large contributions they make every year. This plan is only applicable if the enterprise is profitable and well established, and it's best when the participating employees are less than five and no more than 10 in amount.
The 412(k) plan works best when the business owner or principal participant is 50 years old and over or with no more than ten years to retirement. It'sIt's also favorable when the owner contributing to their employees is the oldest member of that firm's plan participating workforce. Although plan loans are beyond the small business owner's scope, no policy loans for this plan can be outstanding at the end of the year. The 412(i) Plan also lacks investment flexibility since it can only be funded through a guaranteed insurance contract.
For many small businesses or professional firms, a 412(i) Plan provides simplicity and maximizes tax-deductible incentives to secure a higher than usual retirement income. In its early years, the plan's contributions are by design huge and can also be less appealing if the number of participants is high. However, since a portion of the benefit is funded by life insurance, participants can increase initial contributions while leveraging.