[Welcome Industry Radar readers!]
At a meeting I recently attended, one of the speakers threw out a couple of "buzz alphanumerics" (these are like "buzz words," but different): 412i and 409a. Neither one of these are brand new, and both of them relate to the use of life insurance in defined benefit deferred compensation plans.
Whether qualified or not, deferred compensation plans are a valid, and valuable, way to accumulate additional dollars towards retirement. By "putting off" (deferring) taxable income today, one hopes to enjoy greater purchasing power with those dollars in future years.
Qualified Defined Contribution plans, such as IRA's and 401(k)'s, offer immediate tax relief, but come at a price: limited access, special rules, an uncertain tax future, to name some baggage. One is also limited in how much one can stuff away in such plans: the gummint determines how much can getted socked away, and has special rules for highly compensated folks. Such plans are essentially defined by the amount one may contribute, thus the term "defined contribution."
Non-qualified plans, on the other hand, don't have such handcuffs. About the only real limit is the amount one is willing to sock away into them. There are variations on these plans, of course, but they remain relatively burden-free (for the most part). The biggest obstacle has usually been the pocketbook. Since one is limited by practicality, these plans are essentially defined by the amount one can contribute, and so it becomes a "de facto" defined contribution-type plan (although I'll quickly point out that's a characterization, and not a definition). These typically use life insurance policies as the accumulation vehicle, for a variety of reasons.
But what happens when you "marry" the two ideas: a qualified plan with immediate tax benefits, and the guaranteed growth (and leveraged death benefit) of permanent life insurance? And what if one could set up such a plan defined not by how much one may contribute, but rather by how much one expects to receive come retirement time? Well, we'd call that a "defined benefit" plan, and that's where these two "buzz alphanumerics" come in:
412i plans fall under the rubric of "Defined Benefit Pension Plans," which lay out how much a given person will receive down the road. Based on that person's age (and other demographics), he may be able to put in much more cash, much more quickly. The downside, of course, is that it works best in small companies, and requires some big cash commitments. And because it's based solely on permanent life insuance plans, there's not much flexibility.
409a isn't a plan, per se: it's a (relatively new) section of the code relating to how defined benefit plans (and their funding vehicles) are taxed. You didn't think Uncle Sam was going to ignore the potential bajillions [ed: a highly technical accounting and actuarial term] of dollars that could conceivably be tucked away in such plans, did you?
Still, these plans remain an attractive and effective means towards growing retirement income. If you're interested, you'll need at least two resources that you know and trust: an accoutant, an independent insurance agent, and someone to handle the administrative end (I know, that's three).
Now you know.
Posts
