Defined Benefit Plans: Breathing New Life into a Coveted Benefit
(ARA) - Mention Defined Benefit Plan to most employees and their reaction is "wouldn't that be nice." Defined benefit plans -- where employers set aside money in a retirement plan that guarantees benefits after a certain number of years of service -- have been in rapid decline for more than a decade.
Why? Ask employers: High cost, complex regulations and actuarial calculations and potential underfunding issues.
Mention the same concept to a small business owner and you can add one further concept to that litany: "Totally out of the question." In actuality, a Defined Benefit Plan may be one of the most accessible -- and desirable -- benefits for a small business to consider.
What most small business owners don't know is that deep in the Internal Revenue Code is a provision that makes it both cost effective and highly advantageous -- particularly from a tax-planning point of view -- for a small business owner to set up exactly that: A defined benefit plan. The provision has actually been around since 1979, and it's contained in section 412(i) of the IRS code, which is how these plans get their name.
"A 412(i) plan is one of the least understood yet most effective tax-advantaged savings instruments available to a small business owner," says David Gantman, a Minneapolis-based executive and corporate benefits planner and a 412(i) expert. "The beauty of these plans is that they provide all the positives of a traditional defined benefit plan but with fewer of the complicated reporting requirements or the investment risks of a traditional plan."
Good candidates for such plans include surgeons' groups, orthodontists and dentists, manufacturer reps, real estate and mortgage professionals, consultants, board of director members, farmers and private practice professionals.
How do the plans work? Traditional defined benefit plans generally are funded by a sophisticated mix of investments. A 412(i) plan vastly simplifies this process through the use of insurance products -- whole life insurance and annuity contracts -- as the funding mechanism.
"In a 412(i) plan the insurance company accepts the risk of earning too little and living too long," says Mark Zingle, president of Zingle and Associates, a Minneapolis fee-based specialist in 412(i) plan design and. "The use of life insurance and annuities to fund the plan eliminates the need to construct a portfolio using various assets."
Tax considerations are an important consideration for all qualified retirement plans. Within limits, all contributions to a qualified retirement plan are taxed. "An important difference between a traditional defined benefit plan and a 412(i) plan is that because insurance is used to fund the plan, a small business owner can contribute considerably more money to a 412(i) plan than a conventional plan, generating a much higher tax deduction," Gantman says.
This allowance involves several key assumptions concerning the structure of the insurance products used to fund the plan. Because of that, it's also important that the type of insurance and the way the policies or annuity contracts are structured be closely examined by your financial advisor to make sure that the plan steers clear of some recent concerns raised by the IRS about these plans.
For more information, contact David Gantman at (952) 903-2218, or e-mail him at david.gantman@glic.com.
Courtesy of ARA Content
