Wouldn't PBGC coverage be a good thing for one participant Plans?

[RayJJohnsonJr]

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.

[ETA Consulting LLC]

The PBGC rep's statements would be a bit shortsighted as the desire for a one person plan to do it is primarily for nefarious reasons. A one-person plan can automatically exempt themselves from the combined plan deductibility rules for DB/DC; a no brainer. I would imagine the IRS would challenge this as gaming the system (but that would be an interesting case).

Good Luck!

[RayJJohnsonJr]

The PBGC rep's statements would be a bit shortsighted as the desire for a one person plan to do it is primarily for nefarious reasons. A one-person plan can automatically exempt themselves from the combined plan deductibility rules for DB/DC; a no brainer. I would imagine the IRS would challenge this as gaming the system (but that would be an interesting case).

Good Luck!

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?

[Andy the Actuary]

There is no question the PBGC would welcome the additional dues but your client is uninsurable in accordance with ERISA.

[ETA Consulting LLC]

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?

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!

[RayJJohnsonJr]

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?

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?

[emmetttrudy]

If your plan is covered by the PBGC you are not subject to the combined plan deduction limits.

[RayJJohnsonJr]

If your plan is covered by the PBGC you are not subject to the combined plan deduction limits.

Another opportunity to be "nefarious"

Thanks

[shERPA]

"Enjoy"?

[RayJJohnsonJr]

"Enjoy"?

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

[david rigby]

It's possible my copy of ERISA is out of date, but would this plan fall under ERISA section 4021(b)(9) or (b)(13)?

If so, no PBGC coverage, not even optional.

[RayJJohnsonJr]

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

[Effen]

Just to make sure I have this straight, a sponsor of a 412(i) plan (that is a plan that is fully insured and back up by the reserves of an insurance company), would also like to be covered by the PBGC who would double guarantee a portion of the benefit? You already have an insurance company guarantee that some may argue is stronger than a governmental guarantee, and on top of that, your client also wants a governmental guarantee? Are they concerned the insurance company will go out of business? If so, why did they purchase the contract?

They are already most likely funding the plan at extremely conservative rates, putting in much more than is really necessary (my opinion) and they want to give even more money to the government for a 2nd guarantee? Maybe Ned is convincing them of the advantages of even more deductions?

Even if the PBGC guarantee was available, it would only cover a relatively small portion of the benefit. Benefit caps and phase-in provisions are designed to limit the guarantee for owners of the company.

Also, just because you sent the PBGC a payment doesn't mean they will honor the guarantee. Lots of history where the PBGC determined plans were not covered after years of premiums being paid. Typically the PBGC will just refund the premium and wish you luck.

If the PBGC covered one life plans, what incentive would sponsors have to adaquately fund and invest prudently? If the PBGC will just pick up the tab, why would I bother to fund it?

This thread is so asinine; I can't believe I just wasted time posting a response.

[SoCalActuary]

Effen - it's the deduction limit on the companion DC plan. That is the only upside to this.

[ETA Consulting LLC]

This thread is so asinine; I can't believe I just wasted time posting a response.

Pushing the "Dis-like" Button. Borderline inappropriate.

Sometimes it's good to have a discussion, even if the topic being discussed is a moot point that is far in left field. In many instances, there is still something to be learned (i.e. deductibility) which doesn't necessarily have anything to do with the original post. In the end, we get stronger by being able to engage in the conversation and express our ideas while building each other up; not tearing each other down.

Even if the PBGC guarantee was available, it would only cover a relatively small portion of the benefit. Benefit caps and phase-in provisions are designed to limit the guarantee for owners of the company.

Also, just because you sent the PBGC a payment doesn't mean they will honor the guarantee. Lots of history where the PBGC determined plans were not covered after years of premiums being paid. Typically the PBGC will just refund the premium and wish you luck.

If the PBGC covered one life plans, what incentive would sponsors have to adaquately fund and invest prudently? If the PBGC will just pick up the tab, why would I bother to fund it?

Pushing the "Like" button.

This is why I immmediately went to the deductibility argument. That would appear to be the primary reason a plan that is not otherwise subject to PBGC protection would want PBGC protection; not for the benefit, but increased deductibility.

That's not a waste of time

[RayJJohnsonJr]

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

[Effen]

Ok, maybe "asinine" was too strong of a word, but really, what does your client want protection from? He is in complete control of his situation and the plan investments. He can be as conservative as he wants and stay in all cash. If he is ultra conservative and spreads his money around to various financial institutions, the chances of the plan failing due to bank or insurance company failure is pretty small. Granted, they can fail, but if they all fail at the same time, why does he think the government would fare any better? He worries that the entire financial system will fail, yet believes in the government will be around to bail him out?

There are no guarantees in this world, and Walking Dead is only fiction.

[mbozek]

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

Under ERISA 4021(b)(9) PBGC coverage is not available to DB plans established and maintained exclusively for substantial owners. A DB plan covering only the owner is no more eligible for PBGC coverage than a plan covering government employees which is excluded under 4021(b)(2) regardless of whether the PBGC accepts the premiums because the exclusion is statutory. Your assumption of entitlement to government guaranteess for business owners is shocking (and Not as depicted in 'Casablanca') because you want a government agency that has a shortfall of $23B in pension benefits it has guaranteed to extend financial guarantees to a privledged class of business owners who are statutorily inelgible in order to protect them from the volitality in investments that over 90% of US employees are exposed to. Why should self employed business owners have their retirement expections guaranteed by the government over employees' social security benefits? No one has been able to explain how the PBGC is going to grow their way out of the $23B deficit other than by substantially raising premiums on the declining number of DB plans while the number of failed employers grows, e.g., Kodak, AA, or the more likely scenario of an infusion of cash from taxpayers similar to Treasury loans made to Fannie and Freddie ($160B and growing each month) because of the default of homeowers on their mortgages without any hope of recovery.

As a separate matter I believe that after exec life failed the PBGC issued a statement that it did not insure retirement benefits guaranteed by an insurance company.

[RayJJohnsonJr]

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.

[Andy the Actuary]

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.

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.

[RayJJohnsonJr]

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.

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.

[Mike Preston]

Rene,

I think you are missing a key point. The PBGC guarantees benefits to participants who have no direct control over how the plan invests its assets, nor any control over the level of benefits being promised (except through collective bargaining). The business owner is 100% in charge of how the funds are invested and 100% in charge of what the benefit levels should be.

It would be actuarially unsound to provide insurance to one person plans. The moral hazard is just too great. What would stop the owner from investing wildly if the government provided such a guarantee? It would be a "Heads I win, tails you lose" game that the government tries to avoid.

I'm not saying that the PBGC has always been operated on an actuarially sound basis. We both know that it hasn't (just look at any of the big bankruptcies in the telecommunications industry where corporate raiders pumped up benefits via huge deals with unions and then, as part of the business plan, laid those liabilities at the feet of the PBGC by declaring bankruptcy).

But there is no need to pile on the actuarially unwise concepts. Especially when the PBGC is so wildly underfunded, as it is now.

mike

[Effen]

Very well put Mike - much better than calling the idea "asinine" or "nefarious".

[david rigby]

The moral hazard is just too great.

Amen!

[RayJJohnsonJr]

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.

[Effen]

And just how do you think the other 99.99% of 412(i) sponsors would react to the PBGC required premium to insure a fully insured product?

[RayJJohnsonJr]

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.

[mbozek]

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.

While your premise sounds palusible in theory, recent financial history indicates that acquiring risks that are deemed to be unlikely can bring down the largest insurers with AAA credit ratings. AIG insured almost $450B in credit obligations of 300 european banks for which it recieved a palty 20 basis points in premiums for guaranteeing against the remote contingent risks of a default/decline in value of the securities. When the Banks CMO's begain declining in value after 2006 AIG was required to put up cash collateral equal to the decline in value which culimated in needing $50B in cash in Sept 2008 or file for bankruptcy. To prevent a collapse of the global financial markets the Fed and treasury bailed out AIG with an infusiion of $180B in cash/loans and today the US govt owns 50% of AIG. Accepting remote contingent risks can result in a catastrophic event for any financial institution.

[Guest rex]

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

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.

[Effen]

Plans that were once called 412(i) plans, are now properly called 412(e)(3) plans, and are exempt from PBGC coverage.

[Andy the Actuary]

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.

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.

[mbozek]

Plans that were once called 412(i) plans, are now properly called 412(e)(3) plans, and are exempt from PBGC coverage.

That makes sense - Why should the fed. govt guarantee obligations that are insured by state insurance funds.

Is this the exemption for a DB plan that is treated as individual account plan defined in ERISA 4021(b)(12)?

[RayJJohnsonJr]

Plans that were once called 412(i) plans, are now properly called 412(e)(3) plans, and are exempt from PBGC coverage.

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

[RayJJohnsonJr]

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.

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.

[Effen]

From Page 8 of the instructions:

Plans exempt from variable-rate premiums.

Three types of plans are exempt from paying a variable-rate premium:

♦♦Plans with no vested participants;

♦♦Insurance contract plans described in section 412(e)(3) of the Internal Revenue Code;

♦♦Plans that have issued a Notice of Intent to Terminate (NOIT) in a standard termination (see Chapter V. Plan Terminations) where ...

[Guest rex]

Plans that were once called 412(i) plans, are now properly called 412(e)(3) plans, and are exempt from PBGC coverage.

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.

[RayJJohnsonJr]

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

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

[RayJJohnsonJr]

Plans that were once called 412(i) plans, are now properly called 412(e)(3) plans, and are exempt from PBGC coverage.

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.

[RayJJohnsonJr]

From Page 8 of the instructions:

Plans exempt from variable-rate premiums.

Three types of plans are exempt from paying a variable-rate premium:

♦♦Plans with no vested participants;

♦♦Insurance contract plans described in section 412(e)(3) of the Internal Revenue Code;

♦♦Plans that have issued a Notice of Intent to Terminate (NOIT) in a standard termination (see Chapter V. Plan Terminations) where ...

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

[Guest rex]

The index annuity is another illusion. They do not produce returns similar to market. Theyare just another fixed annuity with a different credit rating. They might produce more or less than a "typical fixed annuity" but it will always be very similar to fixed products. Studies support this and frankly again one only needs to realize what the insurance company is doing to figure this out. They put most of the money in us treasuries/bonds and a small part in options. If the options pan out then the person possibly gets more. If they dont then the guarantee is maintained given the majority in treasuries/bonds. Since little money is ever in the market, they wont get market returns. There are reasons why the insurance companies are allowed to change the crediting at their leisure yearly and the number of surrender years. It is to ensure their solvency and not the clients best return. Sadly many are told they are getting like market returns with little to no risk. There is no free lunch for individuals and there is no free lunch for insurance companies.

[Effen]

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

Good catch. They are only exempt from variable premium. They are still required to file and pay the base premium.

[John Feldt ERPA CPC QPA]

"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."

Oh, of course - what was I thinking - all along I thought the hidden, but real reason for the 412(e)(3) plan, a.k.a. 412(i) plan, was so the insurance salesman could finally buy that yacht. If that's not true, then who knows, maybe Ned Ryerson doesn't even sell these 412(e)(3) plans?

[RayJJohnsonJr]

"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."

Oh, of course - what was I thinking - all along I thought the hidden, but real reason for the 412(e)(3) plan, a.k.a. 412(i) plan, was so the insurance salesman could finally buy that yacht. If that's not true, then who knows, maybe Ned Ryerson doesn't even sell these 412(e)(3) plans?

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.

[John Feldt ERPA CPC QPA]

Ah, master is wise to shun statements or declarations that have no merit or support as backup. What does master teach regarding casual comments lightly humored intended to assist in perspective refocus?

[RayJJohnsonJr]

Ah, master is wise to shun statements or declarations that have no merit or support as backup. What does master teach regarding casual comments lightly humored intended to assist in perspective refocus?

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

[Guest rex]

Ah, master is wise to shun statements or declarations that have no merit or support as backup. What does master teach regarding casual comments lightly humored intended to assist in perspective refocus?

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

Putting permanent life insurance within a qualified plan is 99% a horrible idea for the client. Its in particular a bad idea if they actually need permanent insurance since the product can not be rolled into an ira and thus at retirement or if the plan/company closes, the policy will need to be purchased out for its real fair market value using the higher of the PERC or NITR/ITR values which is frequently more money then the client has on hand and thus is forced to surrender the policy for a horrible return and even more likely a loss especially when considering inflation. While putting permanent insurance within the plan gives a higher deduction, it only helps the agent and the insurnace company. Much better to buy your insurance outside the plan which will typically be better as term as well since few people actually need a permanent death benefit.

Deferred annuities are only good if you want an anuity. For most people they still are a poor choice especially within a qualified plan but if someone is ultra conservative then fine. If you arent ultra conservative or very close to retirement, then most people should avoid promoters of these plans.