Steven said:
Can't a small business owner always give him/herslef extra salary and
put the extra into a personal annuity policy and reach the same
effectiveness? Wouldn't this way help the employer to avoid giving the
benefit to qualified employees?
As Cal notes, the problem is that that salary would be
immediately taxable to the owner/employee, while the amount
that goes into a defined benefit pension plan (whether
funded with insurance in a 412(i) plan or just a vanilla
trust plan with an actuarial valuation) is not currently
taxable to the owner. Tax is not imposed until benefits are
received from the plan, normally many years later with all
of the benefits of deferral.
Now, that said, the advantage of not using a qualified plan
is that you can discriminate at will. So you can fund only
for yourself, though you will give up the current tax
benefit of no current tax on the individual. So, frankly,
it becomes a "balancing act" of looking at the employee and
administrative costs imposed by a qualified plan vs. the
overall tax benefit of the plan to the owner. If the
expenses are low enough, it makes sense to go the qualified
route.
Now, that said, there are a number of qualified plan
options, including various defined contribution structures
that may work better if the ages of those that would be
covered make a defined benefit plan unworkable.
Finally, when looking at a 412(i) plan, be suspicious if the
only thing the promoter talks about is the large current tax
deduction and never talks about the overall investment
performance of this policy. While a larger contribution
clearly gets a larger tax deduction, I point out to clients
that *I* can eliminate any tax in their corporation as well
by simply charging an outrageous accounting fee <grin>.
Make sure if you go for a 412(i) plan that the underlying
insurance product is one that makes sense and that your
contribution does eventually result in more money in your
pocket than would going without.
I say that only because I've seen presentations for 412(i)
plans where the "current tax deduction" was the benefit that
was being hammered home, without regard for whether that
wonderful deduction existed only because we have a policy
with incredibly high expenses. And, as well, you should
compare a 412(i) plan against the trust alternative, where
investments are simply held by the plan trust and the amount
of contribution is actuarially determined each year.
I'll put it this way--generally a number of qualified plan
options should be considered before "settling in" on
one--and beware of anyone that claims to have the "magic
bullet" that works in all cases. In the qualified plan
arena, minor changes in facts can result in a very different
plan being the best fit.
