Scott Mullady on 412(i) Plans
Principal, The Heritage Group, LLC

Large Tax-Deductions

Business owners are often frustrated by the limitations placed on traditional profit sharing and 401(k) plans. In 2003 the contribution limit for an individual to these types of plans is $40,000. For the high income and high net worth participant this represents a relatively small tax deduction.

412(i) plans are IRS approved pension plans that offer significantly higher contribution levels. For instance, a 50-year-old earning $160,000 in W-2 compensation could receive a company contribution to a 412(i) plan of $200,000. This amount is fully tax-deductible to the corporation and not income-taxable to the participant. A 60 year old in the same income category could receive over $350,000.

These larger contributions serve two purposes. First it significantly reduces the income tax liability of the small business owner and secondly, allows the business owner to catch-up on his/her retirement plan and accumulates a large tax favored nest egg in a relatively short period of time.

Safety

With the stock market debacle of the past several years, individuals are rediscovering asset allocation. They understand that there is a place in the portfolio for safe investments, especially as retirement grows closer. One of the unique features of a 412(i) plan is that it must be invested in guaranteed investments with a minimum rate of return. We know exactly what the participants will have in their account at the end of year 1, year 2, year 3, etc.

Cost and Low Administration

Due to the guaranteed nature of the 412(i) plan, many of the complexities of a traditional pension plans are eliminated. There are no investments to choose, reporting is limited and an actuary is not needed. For a 5-person group the total annual administration is $1,100 per year.

Estate Planning

If set up properly, the 412(i) plan can be an extraordinary estate planning tool. It allows for the purchase of life insurance utilizing pre-tax dollars. Life insurance always passes income tax-free to beneficiaries and when used in conjunction with a Trust may also pass estate tax-free. In other words we can convert dollars that will eventually be taxed twice, once at the income tax level and once at the estate tax into tax-free dollars.