412(i) contributions

[Guest Vinodh]

Hi I am quite new to administering 412(i) plans and have only bookish knowledge about this and I have an issue.The plan was designed at the participants age of 58 and he was supposed to make only 7 payments(age 65) which was fulfilled in the year 2009.but he has gone ahead and made contributions for the year 2010 and 2011 even before consulting (extra 2 payments) and the amount in question being $220,000 is there any recourse to this and save him from taxation he is nearing 68 now..Requesting an answer ASAP

[Effen]

Why not ask the agent who sold him the policy?

What do you mean he "made contributions"? Did the contributions go to the insurance company? How did he determine how much to contribute?

Who should he have consulted with before making the contributions? If it is a 412(i), all payments should be going to the insurance company based on the amount they are billing. If he made contributions to a trust (and not the insurance company) the 412(i) status is most likely blown and you have some bigger issues.

I think we need more specific information.

[QNPG]

He can work past his NRA and continue to contribute to the Plan for a few more years. Am I missing something?

I'm going to assume the plan is funded with life insurance and not straight annuity. Upon actual retirement, he could buy the policy from the plan or cash it out at that time. I have had many clients work past their NRA by a few years and still contribute the annual level premium, then terminate the plan and buy the policy or cash out the policy at that time.

[AndyH]

He can work past his NRA and continue to contribute to the Plan for a few more years. Am I missing something?

I'm going to assume the plan is funded with life insurance and not straight annuity. Upon actual retirement, he could buy the policy from the plan or cash it out at that time. I have had many clients work past their NRA by a few years and still contribute the annual level premium, then terminate the plan and buy the policy or cash out the policy at that time.

How would you know what the benefits provided by the plan, which generate the "premiums" are? This seems like an excessively broad statement.

In addition, this cash out arrangement strikes me as playing with fire. Lots of potential issues.

[QNPG]

He can work past his NRA and continue to contribute to the Plan for a few more years. Am I missing something?

I'm going to assume the plan is funded with life insurance and not straight annuity. Upon actual retirement, he could buy the policy from the plan or cash it out at that time. I have had many clients work past their NRA by a few years and still contribute the annual level premium, then terminate the plan and buy the policy or cash out the policy at that time.

How would you know what the benefits provided by the plan, which generate the "premiums" are? This seems like an excessively broad statement.

In addition, this cash out arrangement strikes me as playing with fire. Lots of potential issues.

It's been my experience that the purpose of having a 412e3 plan is to have life insurance in the plan. You are funding for a retirement benefit with the bonus of having an insured death benefit. Please excuse my ignorance, but what else would the benefit be?

The original post seemed to be confused about the fact that a participant can work past NRA and still contribute to the plan. Some of my clients choose to fund straight annuity and still go with the 412e3 because the rate on the investment is guaranteed and they are able to get a higher deduction in that plan rathan than a traditional DB.

I am no expert, of couse, just speaking from my experience and trying to help.

thanks.

[AndyH]

Since he was "supposed to" make only 7 payments, isn't it possible that he had a fixed benefit entitlement at age 65 such as 70% of pay, and in such case any post-65 adjustment would be mererly an actuarial increase which might not support any more premium payments?

As Effen said, more information is needed.

Question: If you have one of these plans and fund it at a maximum level and then "roll it out" presumably into a plan that pays lump sums don't you have a 415 issue that the IRS might be interested in? Or if the policy values later increase unnaturally for whatever reason including a decline in a surrender charge don't you have a springing cash value issue potentially?

[Guest Vinodh]

Why not ask the agent who sold him the policy?

What do you mean he "made contributions"? Did the contributions go to the insurance company? How did he determine how much to contribute?

Who should he have consulted with before making the contributions? If it is a 412(i), all payments should be going to the insurance company based on the amount they are billing. If he made contributions to a trust (and not the insurance company) the 412(i) status is most likely blown and you have some bigger issues.

I think we need more specific information.

[Guest Vinodh]

Why not ask the agent who sold him the policy?

What do you mean he "made contributions"? Did the contributions go to the insurance company? How did he determine how much to contribute?

Who should he have consulted with before making the contributions? If it is a 412(i), all payments should be going to the insurance company based on the amount they are billing. If he made contributions to a trust (and not the insurance company) the 412(i) status is most likely blown and you have some bigger issues.

I think we need more specific information.

Yes the contributions have gone to the insurance and company and I dont know how to proceed on this as I have been requested to create a valuation to accomodate those contributions and I feel it is already overfunded.What should I tell?.This was audited in 2007 and a a request for a seperate agreement between contract provider and plan was made by the IRS and the Seperate agreement states that a level premium will be paid till the NRA of the person to accumulate a specified amount and the NRA is clearly stated to be 65 and Current Cash value is nearly 20% more.Is there any recourse to this?

[Guest Vinodh]

Since he was "supposed to" make only 7 payments, isn't it possible that he had a fixed benefit entitlement at age 65 such as 70% of pay, and in such case any post-65 adjustment would be mererly an actuarial increase which might not support any more premium payments?

As Effen said, more information is needed.

Question: If you have one of these plans and fund it at a maximum level and then "roll it out" presumably into a plan that pays lump sums don't you have a 415 issue that the IRS might be interested in? Or if the policy values later increase unnaturally for whatever reason including a decline in a surrender charge don't you have a springing cash value issue potentially?

This is an annuity contract and the yearly contribution is $200,000 and the original benefit formula was 135% fractional benefit reduced for service less than 25 years but this annuity contract was purchased based upon a benefit percentage of 168% so it was already high.i beleive the formula was modified to justify the $200,000 contribution to the annuity contract but no amendment was made to the plan.Andy any thoughts on this?

[Effen]

original benefit formula was 135% fractional benefit reduced for service less than 25 years but this annuity contract was purchased based upon a benefit percentage of 168%

I don't understand what this means? Are you saying the plan document called for a benefit of 135%, but the policies call for 168%? Are you saying that you have a plan document that does not match the amount of the policy?

I have been requested to create a valuation to accommodate those contributions and I feel it is already overfunded

Who is requesting the valuation and what makes you "feel" it is overfunded if you have never done one? Also, what do you mean by "a valuation"? What is it that you are trying to value?

What is your role in all of this?

If the client is funding a policy in excess of the benefit provided by the plan document the contributions for the excess may not be deductible. You could amend the plan up now, but that won't help you with the past contributions. Also, you need to make sure you are not violating the 415 limits. You also should look into the "listed transaction" rules and make sure they are not a concern.

[Guest VEBAPLAN]

6707A file required