412(i) Plans are pension plans that are classified as qualified defined benefit arrangements. They were established by the IRS for small companies and self employed business owners to have a way to save for their retirement and those of their employees. Employers fund these plans with only fixed annuities or both annuities and permanent life insurance.
For the 412(i) Plans to be qualified and legal, they must meet the standards for these kinds of plans. This includes non discrimination rules and eligibility requirements. All employees of the firm who are over 20 years old must be included if they have worked there for at least a year.
These plans have become more popular with time. This is in part because employers fund them with guaranteed investments. When they contribute fixed annuities, the retirement benefits are figured by utilizing the annuity’s guaranteed purchase rate. If life insurance contracts are contributed, benefits are based on the guaranteed cash accumulation of the policies. One advantage this gives the small business owner is the ability to fund contributions in dollar amounts which are larger than the amounts that competing qualified plans allow. The contributions they make are also tax deductible. This reduces the tax burden for the contribution year.
There are several benefits that these plans feature. The monthly benefit for the account holder is guaranteed. They create large income tax deductions for the benefits of the employers. Besides this these plans offer significant death benefits for the account holders. These mean that these 412(i) Plans provide small businesses with an attractive package for obtaining and keeping important talent. They also help the small company’s employees who can count on the guaranteed and fixed benefits at retirement.
412(i) Plans are special because they do not have to live up to complicated rules for funding them adequately. There are also no yearly actuarial requirements to certify that the plan is properly funded. The guaranteed parts of the fixed annuities and life insurance vehicles ensure that these defined benefit plans will be solvent. The only requirement to ensure that this happens is for the employer to continuously pay the annual policy or annuity premiums.
The life insurance company provides all of the guarantees that the plan requires. One important feature of these and other defined benefit plans is that they do not always allow account holders to take loans out of the plan. The Pension Protection Act of 2006 set out many of the standards for these plans and also provided an alternative number of 412(e)(3) for them.
If annuity policies yield a greater amount of dividends or interest than is guaranteed, this benefits the employer. The plan rules stipulate that the extra payments credit against upcoming premiums. If the life insurance contract offers dividends, these are also applied against premiums in the future. They do not go to the account holder, but always to reduce the premiums of the 412(i) Plans.
There are important reasons that employers choose to include a contract of life insurance in such 412(i) Plans. They offer fully tax deductible ways of giving the small business owner and employees death benefits. When the beneficiary receives this benefit, the face value minus the cash value (of the policy’s death benefit) distributes as a tax free income. This life insurance contained within the plan gives the account holders valuable estate liquidity that it will likely need after they have passed away.
The insurance companies which offer the annuity contract or the insurance policy for the plan do not usually provide administration for the 412(i) Plans. This service is typically supplied by IRS approved third party administrators.