ecent stock market declines have triggered substantial losses for many retirement plans, leading clients to rethink investment strategies and life insurance companies to tout IRC section 412(i) plans as a way to protect retirement funds. CPAs should review such plans to advise eligible clients.
HOW DO THEY WORK?
An employer funds such a plan by making annual deductible contributions for eligible workers; the employees are not taxed on the contributions. The plan then purchases from an insurance company annuity contracts with a guaranteed return (generally ranging from 3% to 5%). When a worker retires, the annuity pays an annual retirement benefit taxable to the employee. The employer can make additional deductible contributions to the plan to purchase life insurance on employees’ lives, to be paid to a designated beneficiary.
BENEFITS AND BURDENS
An advantage to section 412(i) plans is the cost savings employers receive due to the administrative ease of calculating annual contribution amounts. Contributions are calculated using a simple present-value formula based on the guaranteed rate of return, the retirement benefit and the number of years until the employee’s retirement. This eliminates actuarial expenses to calculate yearly contributions.
WHO SHOULD INVEST?
For more information, see the Tax Clinic, edited by Frank O’Connell, in the September 2003 issue of The Tax Adviser.
—Lesli Laffie, editor
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