412i Defined Benefit Plans

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Dec 3, 2005 12:17 pm

I recently have become engaged with a prospect who has a 412i DB plan. He is currently funding about 230K per year into this plan, investing primarily in a combo of fixed annutities and life insurance. He is a physician, and 6 other doctors in his group are doing the same...


Whats are everyone's thoughts/experiences/etc on this plan...

Dec 3, 2005 12:31 pm
blarmston:

I recently have become engaged with a prospect who has a 412i DB plan. He is currently funding about 230K per year into this plan, investing primarily in a combo of fixed annutities and life insurance. He is a physician, and 6 other doctors in his group are doing the same...


Whats are everyone's thoughts/experiences/etc on this plan...




This much I know


1.)  Apparently the IRA is looking long and hard at these plans over the last few years for 'abusive practices'.  Done right, they apparently allow you to defer HUGE contributions into a qualified plan for a few years.



2.)  You must, as part of the plan's requirements, make mandatory contributions for a period of a few years, I think around 5.  If you fail to make these contributions, all prior contributions will end up being disqualified and thus taxable.



Complicated high end stuff, often sold by insurance folks.

Dec 3, 2005 1:30 pm

Thanks JoeDaMan.


Based on the research I have done so far, you are right... The IRS has delved into these plans for potnetial abuses, but so far isnt expected to make any seriously fatal rulings on 412's. And, you can defer HUGE amounts of $, usually for 5-10 years.. The nice thing as well, I have heard the payout is somewwhere near 50-60%... We think this guy may have around 1.2-1.8MM in this plan... Can you imagine the production on that bad boy.... Can anyone say Mercedes SL 55 AMG...

Dec 3, 2005 5:04 pm
blarmston:

Thanks JoeDaMan.


Based on the research I have done so far, you are right... The IRS has delved into these plans for potnetial abuses, but so far isnt expected to make any seriously fatal rulings on 412's. And, you can defer HUGE amounts of $, usually for 5-10 years.. The nice thing as well, I have heard the payout is somewwhere near 50-60%... We think this guy may have around 1.2-1.8MM in this plan... Can you imagine the production on that bad boy.... Can anyone say Mercedes SL 55 AMG...



True.


This plan does require the use of an actuary to work backwards and determine the funding necessary.  According to legal guidelines there must be guarantees on the investment product selected, that is way the funding must come from fixed insurance products.

Dec 4, 2005 7:50 pm

If I understand correctly, you must fund the plan for 5-10 years. This being said, will I be able to transfer this account over, or does the guy need to satisfy this funding requirement first...

Dec 6, 2005 10:57 pm

blarmston,


I don't believe that you can "transfer the plan".  These are fully funded with life insurance and/or fixed annuities.  I don't believe there is a way for you to go back and make yourself the writing agent on these insurance contracts/policies.  It is not like making yourself the broker of record on an equity brokerage account.  However...I could be wrong.

Dec 12, 2005 6:22 pm

what is the benefit of these over the normal (non 412i) db plan? (besides commission)

Dec 12, 2005 9:07 pm
guest8900:

what is the benefit of these over the normal (non 412i) db plan? (besides commission)


Large tax deductions for a small employer.


Able to put away unlimited amount of money.


Ability of a small employer to discriminate in the owner's favor.


Ability to put away a large amount of $$$ in a short amount of time.


...

Dec 13, 2005 11:31 am

As a follow up, unfortunately the doc has been contributing into a 419i Welfare Benefit Trust program- something we cannot do. Oh well. The good thing is I have learned that this strategy can be very lucrative when prsented to the ideal prospect. And, the doc is allowing us to meet with him next week and take a look at his investments w/ SB.... Nice....

Dec 13, 2005 8:19 pm

Wow, good deal blarmston! The fact that he's even discussing his accounts with you, much less, allowing you to look at his Smith Barney investments, says that he's unhappy with his current broker.


Good luck!


Dec 13, 2005 8:39 pm

"Wow, good deal blarmston! The fact that he's even discussing his accounts with you, much less, allowing you to look at his Smith Barney investments, says that he's unhappy with his current broker."


From our conversations, it doesnt even seem as if he is terribly dissatisfied with his team at SB. I think he was impressed with my research and folow up regarding the 412/419 situation. I was honest, told him we werent competitive in that space, offerred the names of 2 players in our area that spoeacialized in that, and then transitioned to trying to at least get a chance at earning a piece of his business. From what he has gathered and sent via fax, he has about 2.85MM, and I think he has about 2MM more that is off the table at this point. Thats fine, even if I get 1MM, its a foot in the door. From there, its slowly earning trust and confidence and eventually handling it all...