412(i) plans subject to 415 for optional forms of benefit (e.g. lump s

[Guest PC]

My (very limited) understanding of 412(i) plans is that each year you purchase a piece of an annuity contract for a participant that will be used to provide projected benefits. At termination, the participant can withdraw the value of the annuity. Is the lump sum value of the annuity subject to 415 limits?

For example, the sole participant starts a plan at age 55. The plan provides for a benefit of $135,000 per year payable at age 65 (assume SSNRA = 65). The insurance company calculates the required contribution each year and provides the value of the annuity that has been purchased to date.

At age 65, the participant retires. The insurance company is willing to provide him with an annual benefit of $135,000, but the participant elects to take the lump sum equivalent. The insurance company pays him whatever they think the annuity is worth based on their rates and mortality tables. They disregard the 30-year treasury rate and the plan's definition of actuarial equivalent which would be required for a normal plan by Seciton 415.

Ignoring the fact that the participant probably is much worse off due to insurance commissions and fees, can a participant avoid 415 limits like this?

[Guest Matt Tuttle]

412i plans cannot avoid 415 limits. You can use fixed annuities or fixed annuities and whole life. The guaranteed rates of those contracts are used insteady of actuarial assumptions. Since the guaranteed rates are much lower required funding is much higher and you face a possible 415 problem, usually the funding is lowered to avoid this problem or the plan is established with the understanding that it will be terminated once it crosses over 415.

Matt Tuttle

203-609-9077

http://www.wealthadvisors.bigstep.com

[Guest NPaleveda]

Matt do you mean contributions wuld be frozen-not the plan termiated-NP

[Guest Matt Tuttle]

It depends on what the client is trying to do. Usually this is not an issue because you would lower the initial funding so as not to make it a problem. The more aggressive approach ignores the 415 limits and maximizes funding to worry about it later on.

Matt

[Guest Walt Dallas]

I am missing something. 415(e)only limited the use of multiple plans and combined funding. It was repealed and that allowed the use of a DC and DB plan without aggregation of the limits. The Congressional history makes this clear. I do not see an issue there. Please correct me if I an incorrect.

If there is no other qualified plan, the analysis is done without use of 415. Even without the repeal of 415(e), the funding into a 412(i) is just based on the funding to generate a flow of income of 140K per year. Please correct me if I do not have this correct.

The next issue is the interest rate used by the insurnace company. Any comments of the permissible rate?

[Guest Walt Dallas]

I am wondering about the need for a salary to an employee to justify a DB plan contribution. I have a situation where 2 persons own a corporation generating over 2MM in revenues but has no employees. Can a DB be put in if there is no salary paid? Can 1099 income be used for this purpose?

[Guest Matt Tuttle]

Walt, the current guaranteed rates are in the 4-4.5% area, excess interest is credited to the accounts and reduces future contributions making the plan somewhat front loaded. 1099 income can be used just not passive income. Salary is not as important as age so you can theoretically throw a company into a loss if you want to in future years.

Regards,

Matthew Tuttle

203-609-9077

http://www.wealthprotect.com