Easy 412(i) question

[Guest R. Daestrom]

I always thought in order for a plan to be considered a 412(i) plan, the plan must be funded solely with whole life insurance products. But now an insurance guy is suggesting that if the plan has only fixed income individual annuities via an insurance company, that can be considered as meeting 412(i). This doesn't sound right, does it??? It has to be life insurance, right?

[FAPInJax]

The funding of a 412i plan with SOLELY life insurance products is exactly what the IRS is questioning when dealing with abuses. Normally, these plans are funded with a combination of annuities and life insurance. The life insurance amounts should be calculated using one of the acceptable methods (at least from an IRS viewpoint) - multiple of monthly benefit OR some application of Revenue Ruling 74-307 to issue larger insurance amounts.

[Belgarath]

It is fine to fund solely with annuities. See 1.412(i)-1(b)(2)(i) - "The plan must be funded exclusively by the purchase from an insurance company or companies (licensed under the law of a State or the District of Columbia to do business with the plan) of individual annuity or individual insurance contracts, or a combination thereof..."

You can also use group contracts that satisfy the regs under 1.412(i).

[SoCalActuary]

To expand on the concept:

412i gives an out on the actuarial certification process because the plan is "just paying the premium" as required by the policy. The policy must operate to provide the estimated projected benefit at retirement found in the plan document.

The insurance company is taking on the role of plan actuary and administrator to determine the benefit at retirement and the required annual deposit. (As an aside, the insurance company is expected to reduce the premiums by any dividends and excess cash values above the scheduled rate, essentially an application of the traditional full funding limit if an independent actuary did the work.)

If the insurance contract has a guaranteed cash value schedule, then the costs are predictable. Both annuity contracts and cash value life policies have these features, while variable annuity contracts don't. UL policies would be ok in my opinion, if the insurance company measured the cash value buildup against the guaranteed rates in the policy. I know some people disagree with the use of UL policies.

Finally, to reinforce the point made earlier, annuity contracts and cash value life policies in 412i work together to provide the level premium payments to meet the projected cash value at retirement that will fund the calculated projected benefit. Both have a place in such plans.

[Guest R. Daestrom]

Great answers one and all. Thanks for clearing this up. That'll teach me to question the motives of people selling life insurance. What was I thinking???