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It's Back To Playing By The Rules: Sec. 412(i) Retirement Plans
A common expression in the tax arena is the “red flag” ' the concern that a tax deduction is so large, or the tax benefits of a transaction are so favorable to the taxpayer, that it is comparable to waving a red flag at the IRS, inviting scrutiny and possible adverse consequences. Over the past few years, certain retirement plans created under the provisions of Section 412(i) of the Internal Revenue Code have been designed using methods that are questionable, at best, in terms of compliance with the tax code and regulations. This problem became so pervasive that it was widely anticipated the IRS would respond to the red flags, and put an end to the abuses. Last month, it happened. IRS guidance and proposed regulations were enacted to try to get everyone to play by the rules. Not that the rules are bad; a 412(i) plan could still be right for you. First, let's see what this lesser-known retirement plan is all about.
What's A 412(i) Plan?
A Section 412(i) plan is a type of defined benefit retirement plan. A defined benefit plan is a qualified retirement plan in which the eventual annual retirement distribution is a known quantity (defined benefit); the idea is to fund the plan with whatever amount of money it takes to yield this benefit. To contrast, with a defined contribution plan, the annual contribution is predetermined (defined), but the eventual amount of money available to pay out benefits is unknown.
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