|Now, I noted before that a
custom plan has much more flexibility.
For example, what happens if the client’s business takes a serious
downturn and there’s no extra cash to be had to fund the 412(i)?
|Fortunately, the custom
412(i) is a very flexible plan as noted earlier.
|First, the retirement date
can be changed to reflect a later retirement date. This will, from an actuarial standpoint, cause the annual
payments to be lower. Conversely, if
the owner wants a greater deduction, he can lower the retirement date subject
to certain limitation, of course. We
usually like to have at least a 10 year pay in period for contributions to
|Second, we can review plan
performance. If performance was
better than projected, then there is more assets in the plan than expected,
so the current year’s contribution can be changed to a lower amount. But, remember, the anticipated benefits
are based on the minimum guarantees, so a downturn in the investments will
not work the opposite way – which is good.
Now, let’s say that you don’t want to reduce the annual contribution
but performance is better than the minimum.
Well, in this case you can increase benefits on the back end.
|If the client needs to skip
a year, the 412(i) can be amended, frozen, or even terminated. For the plan
to be terminated, a specific event must occur, such as: there’s a change in
business ownership as a result of an acquisition, transfer or merger; there’s
a significant adverse event in the business; or the business has adopted a
new plan. Upon termination, the plan proceeds may be rolled over into an IRA
tax-free. But, remember, the plan
really should not be terminated if it has been in existence for less than 5 years.
|In the case of a frozen
plan, when the business turns around, the plan can be reinstituted exactly
where it left off.
|As a last resort, we can
even change the plan to a traditional defined benefit plan, which means that
we will have greater income assumptions and thus lower contributions.