52 RI Bar J., No. 5, Pg. 39 (March, 2004). Business Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001.

AuthorRussell E. Towers, ESQ.

Rhode Island Bar Journal

Volume 52.

52 RI Bar J., No. 5, Pg. 39 (March, 2004).

Business Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001

Business Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001Russell E. Towers, ESQ.Russell E. Towers, JD, CLU, ChFC is Vice President of Business & Estate Planning Brokers' Service Marketing Group, Providence, RIThe Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the defined benefit plan maximum annual benefit to $160,000 ($13,333 per month) [IRC Section 415(b)]. This change creates a great opportunity for business owners to create a Section 412(i) "fully insured" defined benefit plan with the largest possible deductions allowed by law. These plans are well suited for business owners and professionals who have few employees and a relatively short period of time until retirement. All eligible employees must be covered under the plan. In 2004, the maximum annual benefit is increased to $165,000.

Generally, a defined benefit plan is a promise of future benefits where an actuary determines the required annual contribution with no flexibility in funding. A 412(i) plan differs from a regular defined benefit plan in a number of ways. The accrued benefit is the cash value of guaranteed contracts and no enrolled actuary is needed to certify the annual contribution. Plan investments must be all fixed annuity and fixed life insurance products. The benefits must be guaranteed based on guaranteed product values from insurance companies that sell 412(i) plans.

Description of a 412(i) PlanPlan benefits are guaranteed by insurance and annuity contracts issued by life insurance companies:

  1. Premiums must be paid when due.

  2. The guaranteed annuity purchase rate factors are the target for monthly benefits.

  3. Only the guaranteed cash value of the life insurance policies may be projected.

  4. The guaranteed annuity interest factor must be used as the pre-retirement interest rate assumption.

  5. Life insurance dividends for whole life or current interest rate for universal life must be used to reduce the contribution for the following year.

  6. The annuity interest paid in excess

of the guaranteed rate must be used to reduce the contribution for the following year.7. No loans are allowed on the contracts.

This results in much higher early year plan...

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