RayJJohnsonJr

Thank you, dcoderre. Is there a remedial program you would recommend for this Plan?

A 403(b) Plan installed by a 501©(3) in 2002 which is funded solely by employee deferrals and employer matches of 100% of pay up to 3% of pay and the matching has a 5 year graduated vesting schedule. The Plan has never filed a 5500. Should The Plan have filed 5500s since 2009? If the match had been immidiately vested, would that have made a difference? I would like to thank you in advance for your input? Rene

Sorry. I'm getting kicked around a bit over doing 412(i)(3) Plans. I do realize there has been a lot of abuse in this are promulgated by overzealous insurance companies and agents. Most of my Plans don't include life insurance, and when they do, it's because the client wants and needs life insurance, is comfortable with whole life or Universal Life, understands the pro's and cons, and their CPA is equally satisfied it is appropriate for the client. The funding is usually an Fixed Index Annuity and the good ones don't pay very much commission. So I don't have a yacht. Anyway, if I was in it to maximize profit, I'd have a jet, not a yacht. Alas, I still fly coach when I can't get a free upgrade. I left insurance companies behind long ago to be an Independent Advisor / Financial Consultant putting the Client's interests first. I could not serve 2 masters (the ins. co. and the client) so I opted for the client and their CPA's. Some clients need 401(k)'s, some PS Plans, some SEP's, some 412(e)(3), some regular DB, and some none of the above. Some just need advice and their money managed in a way they understand. I don't mind an open debate about 412(e)(3) Plans, and should avoid knee-jerk reactions. Thanks

A master once tought me that sometimes the wisest reply is, "I'm not qualified to say." Try to avoid assertions on subjects in which you are not qualified.

I'm with you so far, Effen. Does being exempt from variable-rate premiums mean they are totally exempt from filing?

So all 412(i) Plans are exempt from PBGC coverage? Is this because of 4021(b) "Plans not covered"..(1) "which is an individual account plan, as defined in paragraph (34) of section 1002 of this title"? Thank you Keep in mind the state guaranty assoc is in essence an agreement where the other insurance companies agree to take over business if feasible. The limits of what they protect are also very low (depends on state but 100k for instance) and easily exceeded in most plans. There isnt a big pool of funds and the state itself isnt liable to pay anything. In a massive failure of multiple companies, it probably isnt worth much. In single cases, they make for an orderly transition. VERY well put, Rex.

You seem to contradict yourself. You state above there is some risk to be concerned about and now you want to state that its so small that its a win win for PBGC. These plans only look good for small companies/individuals if you cherry pick the data or if the owner is older and investing over a short time period or if the person is just incredibly conservative. Given how the insurance company makes money but can maintain a guarantee, there arent any 1984 returns in the near future. There is a reason why they are low risk and it isnt like the insurance company has magical investments that the client couldnt access without them. Most people are under the delusion that improving their deductions has saved them money but really they have just paid more for the same defined benefit. You're right. I do seem to contradict myself. One person posted that, since the Plan is Fully Insured, the risk is too small to have PBGC coverage. Another posted the details of the failure of AIG. Of course AIG's failure was due to a risky investment division. Their traditional insurance business were and still are profitable. So there seems to be a lot of debate over whether the Fully Insured Plan is safe or not. That's what makes some Plan Sponsors so nervous. I really think the "high-deduction/low-return" description of 412(i), now 412(e)(3), isn't true anymore. Under most peoples radar, the index-annuity was invented. It promises a guarantee of principal, a low guraranteed interest rate on principal, and if higher, an interest rate tied to a market index, usually the S&P 500. Since their invention in about 1994, returns have been very attractive, and with the only downside risk being the potential failure of the insurance/annuity company. Thank you

Your "win-win" reminds me of Max Von Sydow warning Robert Redford in 3 Days of the Condor that [it will end when] someday a car will pull up and a friendly face will open the door and offer you a ride. That's funny. I liked that movie.

So all 412(i) Plans are exempt from PBGC coverage? Is this because of 4021(b) "Plans not covered"..(1) "which is an individual account plan, as defined in paragraph (34) of section 1002 of this title"? Thank you

I didn't think all 412(i) DB Plans were exempt from PBGC, only the single participant who is owner were exempt. Am I mistaken on that point? But you are right in that all the "single participant who is owner" Plans who like being exempt from PBGC would be aggrivated by the increased administration and expense. If it were mandatory.

I would like to thank you all for your valuable input. Even the comments I did not completely agree with were a learning opportunty, for me, and I hope for others as well. Although I think we have wrestled this subject to the ground, I am left with one question, albeit a mute point since the PBGC would be unlikely to do it anyway: Since, by law, a 412(i) DB Plan is never underfunded, and, by law, the investments are "Fully Insured," the PBGC's risk would be extra-ordinarily low. By allowing coverage of these Plans the PBGC gets more premium, has few claims if any, and the business owner has a little more peace of mind. Wouldn't that be win-win? Thanks again, everyone, for your contribution.

P.S. Unfortunately, regardless of other professionals' opinions and personal beliefs and as I perceive their uncharitable attitude toward you, Title IV of ERISA provides that you are excluded from being covered under the PBGC insurance program. Very thoughtful. I thank you, since the rule of law was what I came here for in the first place.

Dear _______(Small Business Owner Client) As you can see from the above exchange of Pension Plan Professionals, you are not very well thought of. My querries into the possibilties of PBGC coverage for your 412(i) DB Plan assets were met with disdain. I realize that banks are able to offer their savers FDIC insurance and employees of companies that fail such as Kodak, American Airlines, and Hawker-Beachcraft, enjoy PBGC protection, even for their excutives. But that's big business and you are small business. One Professional thinks small business owners are trying to "game the system." Another says says you are looking for a "bailout." And yet another says you are part of of a "privileged class." I realize you may be a real estate agent, manufacturers rep, or a store-owner. You might be a CPA, an ER physician, or own a body shop. Some of you drill for oil and gas, are general contractors, or sub-contractors. Sorry, you don't measure up. I realize you don't want a government subsidy, you never have. I realize you're not asking for protection if your business fails. You are wondering why you are prohibited from enjoying the same protection against investment company failure that all other Americans get. I don't know. But, apparently, small business owners are thought of as second-class citizens. Only big business gets bailed out. Only big big business is too big to fail. You are expendable. There's no need to wonder why I understand your plight. I, too, am a small-business owner. I, too, pay the for the licenses, the fees, the compliance, and the regulations. After that I pay for the professional liability insurance, contribute to numerous charities, and pay my bills. Then i report to more government agencies than there are letters in the alphabet. It's OK. Independent thinkers with character and competence will always survive.

Please let me explain. I don't think some people are getting the picture. And I don't think you will find this so assinine. Please indulge me and let me use some actual examples. I had a client with a 412(i) in 2008 with about $750,000 in an Annuity Company, no life Insurance. When the financial crisis struck in '08/'09 he got VERY woried about the safety of his money. He called me every other day for over a week and I told the truth. I did not think the AA rated insurance company would incur insolvency issues, but anything is possible. Then a story came out that the Annuity Company took $10 billion of TARP money. They didn't need it, but it was a good deal. That straw broke the camel's back and the client immidiately terminated his plan and rolled everything to IRA's, spread it around and got FDIC protection. HE even paid a surrender penalty because he was losing sleep. This was his nest-egg. A comment inferred in a 412(i) Plan people accept a lower rate of return so they can get a larger deduction. At first the deduction IS bigger. But I must tell you that the availability of Fixed Indexed Annuities (an approved 412(i) investment) have performed admirably, outperforming the S&P 500 over the last 10 years and frequently delivering double-digit returns since 1984 when they were inventd. All with no downside risk (except insurance company solvency). What are the alternative investments available in a regular DB: Stocks or stock funds? Miserable performance over the last 10 years, and declined of almost 50%, TWICE. Bonds or bond funds: OK, they've done pretty well what the decline in interest rates, but who knew interest rates would get THIS low. And now we're faced with a 2% 10 year Treasury, and a 3% 30 year Treasury? With the risk of bond value decline if/when interst rates increase, they are unattractive. CD's? Money Markets? Real Estate? So the 412(i) decission is not about bigger tax deductions in exchange for lower yield. It's about safety, predictability, and upside investment potential without downside risk. Unless the insurance company fails. I may be old, but I was here when AAA rated Executive Life went bankrupt. Annuitants were sometimes paid 60 cents on the dollar. Please don't tell me the risk is too minimal to be concerned about. Some people are saving for retirement and want to be sure their money is going to be there when retirement time comes. The desire for PBGC coverage, even though it may not be 100% coverage, is an additional layer of protection, and has nothing to do with a combined DC Plan. People are scared. That's what's happening in the marketplace of Main Street America today

I'm thinking 4021(b). But if PBGC is desired, why not just hire somebody, some outsider, and put them in the Plan?

I guess we carry the stuff uphill for the clients we serve. As we sow, so shall we reap.

Another opportunity to be "nefarious" Thanks

It was a light-hearted statement written to explain how a series of events could be structured in order to circumvent written rules. For innstance, ERISA protection would not extend to an individual who goes out and heavily funds an ERISA trust to shield assets when he is in the process of being sued (despite the fact that ERISA trusts are protected from suits). It's just a statement that anyone in such position would definitely want to perform such transaction for reasons contrary to the original design of the transaction. So, my point was that a one-person company where the owner makes millions per year would love to set up a DB plan and have it subject to PBGC coverage. The advantage would be that the PBGC coverage would allow the owner to fully fund a DC plan ($55,500) in addition to maximizing the DB funding. My statement was merely explaining how a PBGC rep would look at it and ask 'why not pick up the additional plan and receive more premiums' while the IRS would challenge the convenience of increasing a deduction to a DC plan by picking up a relatively premium for PBGC coverage. Again, it was a light-hearted statement explaining how small steps to circumvent rules may lead to a free-ride that anyone would enjoy; a no-brainer. Good Luck! Thank you, Mr. toolkit. I checked out your website and it looks pretty good so I registered. I don't mean to waste a lot of your time, but how does the PBGC coverage permit a DC contribution of $55,500?

Wow. I had to look up "nefarious" to be sure I knew the exact meaning. The dictionary says: Wicked or criminal. What do you mean when you say, "A one-person plan can automatically exempt themselves from the combined plan deductibility rules for DB/DC; a no brainer?" It's not a no brainer for me. How does that impact PBGC coverage?

I deal with a few one-owner, one-employee/participant 412(i) Plans. Some of them worry about the safety of their money invested with insurance/annuity companies. Years ago, the exemption from PBGC filing and premium payments were thought to be a convenience. Now, the coverage might be desirable. Can they file for PBGC coverage and therefore have an additional safety net? I talked to a PBGC rep on the phone a few years ago, and he said they could file: "the more the merrier. They need the money." If the Plan did file and pay the premium, what would be the downside? Does it expose the Plan to any risks or excessive oversight? Would the PBGC decline the claim if the insurance company who guarantees the benefit were to fail? Thank you for any and all input.

That's perfect Effen. I knew there was a discount in the benefit for retirement age less than 62. The participant will have 10 YOP and YOS at retirement age. I presume the actuarial equivalents in the plan document and the mortality table determine the discount percentage. Thank you, that was exactly what I was looking for.

Sorry, I phrased that wrong. The reason I put as of 12/31/11 is because the 415 Limit for Defined Benefit Plans in 2011 was $195,000/yr, while the 415 Limit for Defined Benefit Plans went up to $200,000. So what I meant to ask is the maximum monthly benefit, age 55 retirement, retiring 12/31/2015, based on the 2011 max 415 Limit of $195,000. (Not using the 415 Limit of $200,000.) This is a benefit calculation question. Thank you.

For a person retiring on 12/31/2015 at retirement age 55 who's average compensation has allways been above the Annual Limit on Includible Compensation, what would the maximum monthly Defined Benefit as of 12/31/2011? I'm a little confused on that calculation. Thank you.

Thanks, ERISA Toolkit. I thought my question was so dumb, I almost didn't post it. I'm glad I did now.

A practicing physician has a one member LLC with schedule C income of $350,000. The physician owns another one member LLC that is a retail business with Schedule C income of -$180,000. Both incomes are included in the physicians Schedule SE tax tax form. How much is this person's covered compensation for 401(k) plan purposes? Thank you