Annuity Contracts in 412i plans

[Guest Mark Draa]

I'm looking at a proposal for a 412i plan, providing a benefit at the 415 limit (surprise) for the sole participant. Assume for the moment that the illustrated insurance is incidental. Doesn't the projected retirement benefit need to be provided by an annuity contract currently owned by the plan?

The proposal is assuming that a side-fund is maintained and the annuity contract not actually purchased until ARA. The annuity is projected to cost $X at ARA. The insurance has a guaranteed cash value of $Y at ARA. The current contribution to the side fund is equal to ($X - $Y) divided by a temporary annuity factor between now & ARA. Presumably this calculation is adjusted each year to take into account changes in the $Y value due to the actual current insurance cash value.

Now, I haven't seen a lot of these (can you tell?), but I would have guessed that an actual annuity contract would have to be purchased at the onset. Premiums for this annuity contract would be discounted to take into account the projected (guaranteed) cash value of the insurance (because otherwise there would be $ left over after the maximum 415 benefit was paid at ARA).

Comments?

[AndyH]

Well, I know little about these either except the basics. Your comments and questions make perfect sense to me. What you are describing does not make sense to me.

Check out the proposer. I'd be interested in hearing about whoever is proposing this scheme. Nothing about it sounds legitimate except the 415 limit, and that is a surprise.

[Guest flogger]

It is probable that the annuity contract has guaranteed purchase rates for the annuity at ARA. It is also possible that there are guarantees are in the insurance contract for an APR at ARA for converting cash value to a benefit.

[Guest Mark Draa]

Well, even if the policy had the ability to covert the csv to an annuity contract at ARA, there doesn't seem to be enough $ to cover the entire cost of the annuity. That's why they are proposing the side fund, and that's the thing I'm suspicious of. I thought it was very clear that 412i plans could be funded with ONLY insurance and annuity contracts - this doesn't leave any room for an accumulating side-fund.

Now, if they increase the insurance premiums so that the csv WOULD be high enough to buy the annuity, and the contract was so written (I wouldn't think there would be any option other than annuitization), then MAYBE.

I'll do some additional legwork and talk to the insurer.

[rcline46]

Mark, my understanding of 412i is that if there is ANY side fund, ie money NOT in insurance contracts, the 412i exemption is blown up and a Schedule B required.

[rcline46]

In fact, I would be concerned even if the 'side fund' was called a 'premium reserve fund'. For those who don't know insurance, that is really just pre-paid premiums.