The 412(i) Defined Benefit Plan

THE 412(i) DEFINED BENEFIT PLAN

A UNIQUE RETIREMENT PLAN FOR THE SUCCESSFUL SMALL-BUSINESSPERSON

Looking for good news? Try this: Successful small-business owners have a plan that maximizes current tax deductions and secures a guaranteed income at retirement. In fact, the "412(i) defined benefit plan" is the only qualified retirement plan to provide guaranteed retirement benefits payable at normal retirement age, with reduced benefits payable at an earlier retirement date.

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412(i) Plans are ideally suited for small-business owners with six or fewer employees who want to put away a very large, tax deductible contribution. The plan is designed to provide guaranteed retirement income for life--up to $160,000 in 2002, based on documentable earnings--starting at a predetermined date.

"The 412(i) plan has been designed, ideally, for the closely held business owner who, late in life -- say in his 40s, 50s or 60s -- did not lay enough aside and needs to catch up," said Bert Cutler in an interview. Cutler is president of Florida-based Wealth Preservations Strategies, founded in 1972, specializing in tax planning for affluent small business owners.

"Best of all," added Cutler, "the plan can be fully insured, so benefits are paid to a spouse or other beneficiary if the business owner dies. We fund exclusively with fixed life insurance and fixed annuity products," or products with guaranteed minimum cash value returns.

How does the plan work? As an example, said Cutler, "we have an actual client who is 63. He wants to retire in five years." He has documentable compensation of $87,000 a year. "Using whole life to fund the plan, we were able to give him a fully tax-deductible annual contribution of $296,812 in the first year. This will give him a guaranteed monthly income for life of $7,309. There's also a death benefit of $1.845 million."

Drawbacks and limitations: The 412(i) defined benefit plan is not for everyone. There are limitations and restrictions. Among them:

No policy loans are permitted. "No policy loans can be outstanding at year-end," Cutler points out.
No funding flexibility. If benefits are to be guaranteed, the plan must be funded exclusively through insurance contracts.
The plan cannot discriminate. Since the plan is governed by ERISA, it must include all employees in the company or class. "This is why the 412(i) plan works best with businesses having few or no employees," says Cutler.

The bottom line: In the right circumstances, a 412(i) plan is a highly effective tool to help small business owners reduce their taxable income and lock in their retirement security. Says Cutler: "It's a great deal for the owner who wants to catch up on retirement benefits, who is making money and doesn't want to pay the taxes. He can put away a lot of money for himself and he has a guaranteed retirement and death benefit.

A 412(i) plan may be the way to meet multiple objectives. Or perhaps another plan is best for you. Talk to your New York Life agent for an analysis of your needs and a discussion of your options. No cost. No obligation. Just quality service and quality products.

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TEN REASONS TO CONSIDER A 412(I) DEFINED BENEFIT PLAN FOR YOUR BUSINESS

High contribution limits, based on your trackable income, with no funding limitations. Contribution maximums are based on the selected benefit, not a specific IRS limit.
No complex funding rules. Since the plan is based on the selected benefit amount, it is exempt from IRS rules to determine funding. There is no danger of being penalized by over- or under-funding.
Simplicity of plan design. Prototypes are available. "The insurance company generally furnishes it own administration team," explains 412(i) advisor, Bert Cutler. No elaborate filing and accounting is required.
High contribution potential reduces current income.
Increased income tax deductions. The plan is funded with pre-tax dollars. "Looking at the example of one client who can contribute almost $300,000 this year," says Cutler. "This will save him in excess $100,000 in federal taxes, conservatively speaking."
Flexibility. If something happens, explains Cutler, "if you cannot make the payment, you can always amend the plan." In the same respect, you can raise or lower the benefit and, in turn, the contribution amount as circumstances change. Finally, "you can terminate the plan and roll it into an IRA or other plan," says Cutler.
Low administration costs. "Ongoing administration costs are generally minimal," says Cutler, sometimes measured in the hundreds, rather than thousands, of dollars a year.
No quarterly contribution requirements. Unlike with other qualified plans, no quarterly contributions are required. The fully insured model may be funded annually by year-end without the need to pay interest.
No IRS challenges. When a fully insured plan is used, the IRS generally will not challenge the plan assumptions, says Cutler, thus permitting higher deductions. It is the contract guarantees* that govern the required contributions.
*Guarantees. When fixed products are used, the retirement benefit and a death benefit are guaranteed.

*Guarantees based on the claims paying ability of the underlying insurance company.