a 412(i) plan champion agency, inc. we provide consulting services in the business and estate...
TRANSCRIPT
A 412(i) PlanChampion Agency, Inc.
We provide consulting services in the business and estate planning marketplace.
As part of our case design initiatives we form strategic alliances with high quality third party administrators. One of these alliances is with
Economic Consultants, this is their presentation on 412(i) Plans
A 412(i) PlanDeveloped, marketing and administered through Economic Concepts, Inc, and
Today’s Agenda
Qualified Plans
412i Plans
The (i)nnovator
Benefits
Terminatio
n
Options
Case Design
Working with
ECI/Champion
Retirement Planning ObjectivesMaximize Current Tax SavingsProvide Future SecurityProtect Assets from CreditorsAttract and Retain Key EmployeesBuild Financial Freedom
QUALIFED
PLAN TYPES
Defined ContributionDefined Contribution
Defined BenefitDefined Benefit
The “Traditional” Solutions
Defined Contribution Plans
100% of Compensation up to $40,000
Retirement Benefit based on value of participant’s account at retirement
Defined Contribution Plans
Based on a plan allowing for contributions of up to 25% of compensation
Employee
Annual Salary: $40,000
Plan Contribution: $10,000
% of Salary to Plan: 25%
Business Owner
Annual Salary: $400,000
Plan Contribution: $40,000
% of Salary to Plan: 10%
Who Really Benefits from a Defined Contribution Plan?Who Really Benefits from a Defined Contribution Plan?
Defined Contribution Plans work well for the rank & file employees….
But….what about the owners???But….what about the owners???
Defined Benefit Plans
Fund for a retirement benefit of up to $160,000/year
Contributions based on age and income
Defined Benefit PlansAge Income Contribution
40 98,699 82,933
45 98,699 105,846
50 98,699 135,089
55 138,658 179,378
60 160,000 192,729
65 200,000 219,926
Maximum contribution for Defined Contribution Plans : $40,000
And, what about the successful business owner who has
$250,000$300,000$500,000
in Pre-Tax Profitsand doesn’t want to pay 45% to Uncle Sam?
412(i) - a fully insured defined benefit plan
Must be funded with life insurance and/or annuity products
Contributions based on products’ guarantees
•Lower actuarial assumptions than in traditionally funded DB plans
•Lower assumptions mean higher contributions
Yesterday’s 412(i) PlansIn the old days
•Contributions comparable to traditionally funded defined benefit plans
•“Plain vanilla” whole life products
•Favored older clients only
Today’s 412(i) Plans
New product design creates significantly higher contributions
Post plan product flexibilityApplies to younger clients as wellMarket conditions favor more
conservative investment vehicles
The (I)nnovator Funding
•Income tax free pre-retirement death benefits (PS 58 costs) •Moderate early cash value growth•May be exchanged for market-driven policy
•Early cash value accumulation•Long-term portfolio rates (less susceptible to market fluctuations)
Contribution Comparison
Maximum contribution for Defined Contribution Plans : $40,000
Age DB Contribution (I)nnovator40 82,933 209,40445 105,846 335,64150 135,089 374,41755 179,378 470,65760 192,729 457,53165 219,926 465,105
105
(I)nnovator Advantages
Maximizes contributions and tax-deductions
Annuities provide excellent early cash accumulation
Tax deductible life insurance (PS58 costs)Life Insurance provides income tax-free
death benefits
Predictable contribution commitmentAvoids subjecting retirement assets to stock
market volatilityIf market performs favorably, plan benefits
may be funded prior to retirement Frees up dollars for other opportunities
Flexibility for achieving long-objectives
(I)nnovator Advantages (continued)
Target MarketSuccessful business owner or professionalMinimal number of ancillary employeesStable and consistent revenueDesire to maximize contributions for retirement
plan ($100,000 minimum)Desire to decrease income taxesNo existing plan or minimally funded plan.Looking for stable, conservative investment
Business Objectives
Reduce taxes on excess
profitsEstablish a secure
retirement program
Provide an employee benefit
Provide life insurance for
family and/or estate planning
needs
The (I)nnovator Plan
Insurance Policy
& Annuity
Participant
TAXES PAID ON NET CASH VALUES
Distribute Assets•Cash values continue to grow on a tax-deferred basis.
•Insurance policy can provide future tax-free income through policy loans.
OR
Traditionally Funded
Defined Benefit Plan
Participant
PARTICIPANT PURCHASES LIFE INSURANCE POLICY FOR NET
CASH VALUE
The (I)nnovator Plan
THEN, THE CASH IN THE PLAN AND THE ANNUITY ARES ROLLED OVER
TO A
IRA
OR
Profit Sharing
Plan
Life Policy Purchased
•Monies paid for insurance policy are simply “repositioned” in client’s portfolio.•Recharacterized as “qualified monies” - tax deferred accumulation.
•Insurance policy can provide future tax-free income through policy loans.
Case DesignThe picture perfect case…….
Few, if any, ancillary
employees
Case Design (continued)
A more typical case…...
The problem with too many employees
Cost to cover ancillary employees dilutes or negates owner’s tax benefits
All principals may not want to participateContributions based on formula…may
not fit principals’ objectives 50/50 owners @ different ages = different
contributions
Specializes in case design includingSetting appropriate eligibility
requirementsRedefining compensationCapping retirement benefitsMultiple entity planning410(b) Carve outs
NON-CASESCASE
SFor example…...
Controlled GroupsA controlled group exists when the
same 5 or few people own 80% or more of both organizations and 50%
of the ownership is identical.Break one rule, break the controlled
group
Race Car DriverAnnual Contribution: $215,347
Separate entity created for endorsements vs. earnings from races
Clothes Designer & ManufacturerAnnual Contribution: $502,308
Union employees excluded. Of the 25
employees left, isolate the client and his key people into a separate
entity for design selection and licensing.
Electrical ContractorAnnual Contribution: $201,678
Client established a sales and marketing company
Recharacterization of IncomeRecharacterization of IncomeCreative Entity PlanningCreative Entity Planningand
Affiliated Service GroupsProfessional Service Organizations
Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, and insurance
Management Companies (414(m)(5))Difficult to design around, but may be
possible if revenue is generated by activity outside of first entity
Sec. 414(m)
Outside Rental Property
Expert Testimony
IncomeRacehorses
Section 410(b) Carve Outs40% of all eligible employees must be
covered70% of all non-highly compensated
employees must be covered x the percentage of highly compensated employees covered
If there are only 2 employees, both must be covered
Section 410(b) Carve out
4 Partners & 12 Non-Highly Compensated Employees (NHCE)
Section 410(b) Carve out
4 Partners & 12 Non-Highly Compensated Employees (NHCE)
Number of participants reduced to 7.% of owner/participants increased to 40%
from 25%
Doing Business withECI/Champion Agency
Why ECI/Champion?
30+ years in the qualified plan arena (ECI)Tax advantaged plan specialistsExperienced in marketing and administration30+ years in the business owner and
professional marketPersonal case preparation and supportCreative and technical expertise
More information?
Kenneth Sapon R.Ph., LUTCF
President Champion Agency, Inc.
8801 Horizon Blvd NE Suite 320
Albuquerque NM 87113
(505) 265-8511 (800) 274-0433