412e3 Plans

In this post, we compare 412(e)(3) plans with Cash Balance Pension plans, listing the pros and cons. The pros and cons were based upon our review of actual proposals from two different companies. In addition, we reviewed the Internal Revenue Code, the Internal Revenue Manual, Treasury Regulations, and spoke with both companies, including an actuary.

We would welcome the opportunity to review a proposal you’ve been officered, if you have one, to compare it to what we’ve seen, and our numbers. From what we can discern, 412(e)(3) plans are better for those people who are closer to retirement. Cash balance pension plans are superior due to their flexibility in funding year over year, the ability to choose a wider array of investments, and the ability of the self-employed owner to waive his or her funding requirement.

412(e)(3) Plans

·      Make a large contribution in a short time

·      Get a tax large deduction

·      Better for closer to retirement age of 65

·      Guaranteed growth of annuity 0.005 per annum

·      Funding requirement met by insurance product

·      Asset protection

·      Net 0% investment rate

·      Low savings rate defeats tax deduction

·      No investment options

·      Tax Shelter / listed transaction

·      56% audit rate

·      Don’t know whether IRS will accept tax deduction

·      Not using IRS numbers, using INS Co’s #s

·      $ growth will not exceed inflation

·      $ growth is worse than no interest bank account

·      if person deceases, what is cash value?

·      Market adjustment?

·      Surrender value?

·      Mere 10% free withdrawal

·      EE, if EE terminates, potential lawsuit

·      Higher EE cost v CBP or none

·      What happens in year 6?

·      What value builds?

·      What happens in IRS audit?

·      Deductions subject to disallowance for permanency

·      Not diversified, not insured

·      Married to MassMutual for life

·      What is vesting schedule and value? EE.

·      Subject to federal income tax + early withdraw penalty

·      Big commissions



Cash Balance Pension Plans

·      Make a large contribution in a short time

·      Get a tax large deduction

·      Good for short term and long term

·      Tax free growth of money

·      Flexible funding year to year

·      No surrender

·      No free withdrawal provision

·      No market adjustment

·      Uses IRS numbers to calculate deductions

·      Lower employee cost <$3,000/yr

·      Unlimited investment options

·      Low cost to open, operate, and defend in IRS audit

·      Not a listed transaction

·      Straightforward in event of EE termination from plan

·      Not limited with contract

·      Change advisors anytime

·      Change custodian anytime

·      Always buy an annuity closer to retirement

·      Owner can waive funding in event of deficit

·      Supported by an actuary filed with Form 5500

·      CBP raises 0 red flags with IRS

·      Money is free to move within qualified accounts

·      Asset protection

·      Like other qualified plans, withdraws are subject to federal income tax + 10%

·      Pay for administration annually

·      Returns must be filed annually for plan

·      They can’t be left to die