Your Vision Our Solutions™ 412(i) Fully Insured Plan BISYS-Potomac This information is provided for educational purposes only. This presentation neither provides nor implies any tax advice. BISYS-Potomac is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN NASBA phone number: Web site:

Your Vision Our Solutions™ 412(i) Plan A Qualified Retirement Plan – Current tax deduction for all contributions 412(i) Fully Insured Plan Referred to in the IRS regulations as an “insurance contract plan” Special type of defined benefit plan

Your Vision Our Solutions™ Two Types of Qualified Plans Defined Contribution – 401(k) is an example – Contribution defined by compensation Example - Contribution equal to 10% of pay – Retirement income or “pot” not defined, depends on investment returns along the way Defined Benefit – 412(i) is an example – Retirement benefit or income based on compensation Example - Benefit equal to 100% of average monthly compensation – Retirement income or “pot” defined

Your Vision Our Solutions™ Defined Benefit Plans Funding for a “pot” at retirement age – Greater the “pot” and/or less the time to fund, the greater the contribution needs to be Historically defined benefit plans have been used by many companies of all sizes Defined contribution plans gained favor in recent years – Easier to define cost Leveraged buy-outs, fiasco with GICs in 70’s and 80’s were the death knell to DB plans – Restrictions, limitations, administrative cost increases, etc.

Your Vision Our Solutions™ Defined Benefit Plans The Good Defined benefit plans can be the best way to provide for a large tax deduction for a retirement plan – Especially for those who are older – Catch-up funding

Your Vision Our Solutions™ If Goal Is Max Deduction Owner age 52, Salary $160,000 $79,085 Defined Benefit $40,000 Target Plan $40,000 Money Purchase $40,000 Profit Sharing Deduction Limits:

Your Vision Our Solutions™ Defined Benefit Plans The Bad Thought to be too expensive if too many people to fund for Problems because of the design of the plan – Administrative costs – Actuarial costs – Unknown/uneven funding

Your Vision Our Solutions™ 412(i) Plan Retirement benefit based on guarantees inherent in specific insurance company products – Annuities, life insurance – Contributions based on the guaranteed interest rates of the products No actuarial computations Largest initial tax deductible contribution possible

Your Vision Our Solutions™ If Goal Is Max Deduction Owner age 52, Salary $160,000 $210, (i) Defined Benefit $79,085 Defined Benefit $40,000 Target Plan $40,000 Money Purchase $40,000 Profit Sharing Deduction Limits:

Your Vision Our Solutions™ 412(i) Plan Tax Law Changes EGTRA - Economic Growth and Tax Relief Reconciliation Act Higher compensation amount can be used – Raised from $170,000 to $200,000 Higher retirement benefit amount to fund to – Raised from $140,000 to $160,000 Lower age to fund to – Lowered from Social Security retirement age to 62

Your Vision Our Solutions™ 412(i) Plan Ideal Client Profile Small business owner Age 45 or older Profitable company --- Steady income stream Wants large tax deduction now Maximum number of employees is usually 4-7 – Or family business – Or with high turnover

Your Vision Our Solutions™ 80% Don’t Have Plans! Why not? – Owner doesn’t get a large enough share of the company contribution – Owner doesn’t get a large enough contribution in terms of the dollar amount – Complicated and expensive administration – No advisors for guidance

Your Vision Our Solutions™ 412(i) Plan – How It Works Who Participates Cannot discriminate, but can leave out – those who are 21 or younger – working 1,000 or less hours – those benefiting from certain union plans

Your Vision Our Solutions™ 412(i) Plan – How It Works Plan Funding As per Code Section 412(i) – “funded exclusively by the purchase of life insurance contracts”…..with “level annual premium payment” – “benefits…guaranteed by an insurance carrier..to the extent premiums have been paid” – “no policy loans are outstanding at any time during the year”

Your Vision Our Solutions™ 412(i) Plan – How It Works Plan Funding Usually 100% fixed annuity or split funded with fixed annuity and life insurance, often Whole Life Benefits must be guaranteed

Your Vision Our Solutions™ 412(i) Plan – How It Works Accrued Benefit The accrued benefit is simply the cash value of the insurance and annuity contracts issued to each participant All participants subject to the vesting schedules of qualified retirement plans

Your Vision Our Solutions™ 412(i) Plan – How It Works Recap Plan designed to provide a “pot” at retirement Funding to reach benefit based on “guaranteed” rates of annuity/life insurance used Future contributions reduced by amount above “guaranteed” or “current” Can include life insurance

Your Vision Our Solutions™ 412(i) Plan – How It Works Why Buy Life Insurance? Ability to “guarantee” a retirement income for loved ones Lower net cost since purchased with pre-tax dollars Does not lower benefit provided, it increases the contribution made, maximizes tax-deduction Subject to “incidental insurance” rules of Treasury Reg. Section (b)(1)(i)

Your Vision Our Solutions™ Life Insurance in the Plan Incidental Benefit Limits 100 TIMES RULE – Life insurance limited to no more than 100 times the expected retirement benefit – Most common method RULE – Life insurance is limited to 66 2/3% of the “theoretical level premium” of a non-insured plan.

Your Vision Our Solutions™ Economic benefit cost to employee – Now based on “lowest term rates” of carrier – Will be based on Table 2001 rates Flexibility of product may be an issue unless you fund for a long time Policy can be distributed based on surrender value in policy 412(i) Plan – How It Works Life Insurance in the Plan

Your Vision Our Solutions™ 412(i) Plan – How It Works What Happens If? Employee leaves plan – Plan benefit based on values in that employee’s policies Employer needs to lower funding – Plan design can be altered - with valid reason – Plan can be shut down- with valid reason Minimum funding period 5 years, should assume 10 Options after plan terminates or employee leaves – Rollover IRA -- provides equity investment

Your Vision Our Solutions™ CASE DESIGNS & Q&A