Direct Recognition Variable Investment Plan (VIP) FAQs


Frequently Asked Questions

 

1.   WHAT TYPE OF COMPANY BENEFITS FROM A VIP?
A:  Any company with highly compensated owners and management looking to increase tax-deductible contributions to $100,000 or more.

 

2.   WHAT DOES DIRECT RECOGNITION MEAN?
A:  It means that a participant’s benefit is credited with the actual investment performance of the plan.

 

3.  WHAT IS A VIP ARRANGEMENT?
A:  A VIP arrangement consists of three fully integrated elements including 401(k), profit-sharing and VIP defined benefit contributions.

4.   IS EVERY VIP REVIEWED BY THE IRS?
A:  Yes, every plan is submitted to IRS for a favorable determination of the plan’s tax qualification.

 

5.   HOW ARE PLAN ASSETS INVESTED?   
A:  401(k) and profit-sharing plan assets are generally participant directed and VIP plan assets are invested pursuant to the plan sponsor’s objectives and directions.

 

6.   IS A VIP AN ARRANGEMENT TREATED LIKE A 401(K) OR PROFIT-SHARING PLAN FOR TAX PURPOSES? 
A:   Yes.  A VIP gets the same tax treatment as any other defined contribution or defined benefit plan including 401(k), profit-sharing and cash balance plans.

 

7.   ARE EMPLOYER CONTRIBUTIONS TO A VIP PLAN TAX DEDUCTIBLE?  
A:  Yes.

 

8.  DO VIP ASSETS ACCRUE ON A TAX DEFERRED BASIS? 
A:  Yes.

 

9.  CAN A VIP PARTICIPANT’S BENEFIT BE ROLLED OVER TO AN IRA OR OTHER RETIREMENT PLAN? 
A:  Yes.

 

10. ARE VIP ASSETS EXEMPT FROM THE CLAIMS OF CREDITORS?  
A:  Yes.

 

11. IS THERE A CONTRIBUTION LIMIT?
A:  Yes, the same limit that applies to cash balance and traditional defined benefit plans.

 

12. IS THERE A LIMIT ON HOW MUCH CAN BE CONTRIBUTED ON BEHALF OF OR ACCRUED BY A PARTICIPANT IN A VIP?
A:  Yes, the same limit that applies to a cash balance plan.
However, a VIP contains an automatic conversion feature, where there are no limits to roll benefits into an IRA.

 

13. ARE VIP CONTRIBUTIONS FIXED OR FLEXIBLE?
A:  Contributions can be set to automatically decrease when profits are reduced.
Optional contributions can also be made when profits go up.
A significant percentage of contributions is discretionary.

 

14. ARE VIP CONTRIBUTIONS AFFECTED BY INVESTMENT PERFORMANCE?
A:   No.

 

15. CAN VIPs BECOME UNDERFUNDED LIKE CASH BALANCE PLANS?
A:  Since the value of benefits accrued in VIPs is directly tied to asset performance the exposure to underfunding or overfunding is mitigated.

 

16. ARE VIP ASSETS INVESTED ON A PARTICIPANT DIRECTED BASIS?
A:   No, like cash balance plans, VIP assets are invested on a pooled basis.
       The 401(k) and profit-sharing assets in the VIP arrangement are participant directed.

 

17. DO VIP PARTICIPANT BENEFITS GROW WITH A FIXED INTEREST CREDIT LIKE CASH BALANCE ACCOUNTS?
A:    No. VIP participant benefits are credited with the actual investment performance of the associated plan assets.

 

18. IS THERE A LIMIT TO HOW MUCH INVESTMENT RETURN (OR LOSS) CAN BE CREDITED TO VIP PARTICIPANT BENEFITS?
A:  No.

 

19. CAN ANY FORM OF COMPANY IMPLEMENT A VIP PLAN?
A:  Yes. VIPs can be used by partnerships, S-Corporations, LLCs and C-Corporations.

 

This material is for educational purposes and should not be considered a solicitation or an offer of investment advice/securities.

Copyright 2019 USI Insurance Services, all rights reserved.

 

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