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A Defined Benefit Pension Plan is a tax qualified retirement plan established by an employer. Contributions to the plan are made by the employer and are tax deductible to the employer. Taxes on the investment earnings are deferred until benefits are paid at retirement. In order to receive these tax benefits, the plan must meet certain requirements. Some of these requirements are:
- A written plan document
- Discrimination in favor of highly compensated employees is prohibited
- Reporting and disclosure requirements
A 412(i) Defined Benefit Plan is a Defined Benefit Plan that meets the requirements of Section 412(i) of the Internal Revenue Code. In order to meet these requirements, all benefits under the plan must be guaranteed by a life insurance company. There are a number of advantages to qualifying the plan under Section 412(i).
The Pacific Life Insurance Company
Pacific Life has developed a 412(i) Plan that is funded through a combination of life insurance and a fixed annuity. Together these products create a funding arrangement that provides considerable tax savings, excellent funding performance, significant death benefits and still meets the requirements of Section 412(i).
WHY 412(i)?
The following are some of the advantages of a 412(i) Defined Benefit Plan over a plan that does not meet the requirements of Section 412(i):
- The maximum tax deductible contributions to a 412(i) plan are significantly higher than the contributions to other types of qualified retirement plans. For example, the maximum contribution to a regular Defined Benefit Plan for an individual age 53 is $166,200. The tax deductible deposit to a 412(i) plan for that same 53 year old is $302,800
- The plan provides substantial death benefits in addition to retirement benefits. The death benefits are also funded on a tax advantaged basis.
- A regular defined benefit plan is subject to the minimum funding requirements of IRC Section 412. These requirements can be complicated and can result in contribution requirements that fluctuate widely from year to year. A 412(i) plan is exempt from many of these requirements and contributions are more stable and predictable.
- A regular defined benefit plan is subject to Pension Benefit Guaranty Corporation premiums that can become very costly. A 412(i) plan is exempt from a portion of these premiums so that the maximum annual cost is $19 per participant.
- A valuation of assets and liabilities that includes an actuarial certification signed by an Enrolled Actuary is required for a regular defined benefit plan. The services of the Enrolled Actuary create an additional annual cost to maintain the plan. Because all benefits are guaranteed by an insurance company, an Enrolled Actuary's certification is not required for a 412(i) plan.
- The employee may elect to continue the life insurance after retirement or after the plan is terminated. The life insurance can be owned by the individual and, with proper planning, may not be subject to estate taxes.
Please be advised that neither Asset Management Inc. nor any of its agents give legal or tax advice. This information has been derived from sources which we believe to be reliable but has not been independently verified by us. The opinions expressed herein reflect our current judgment and are subject to change without notice. We recommend that you consult with your tax advisor and attorney for complete details before making any final decisions.
Securities Offered Through Mutual Service Corporation, A Registered Broker/Dealer - Member NASD and SIPC
Asset Management, Inc. is not affiliated with Mutual Service Corporation.
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