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?
8. DO VIP ASSETS ACCRUE ON A TAX DEFERRED BASIS?
9. CAN A VIP PARTICIPANT’S BENEFIT BE ROLLED OVER TO AN IRA OR OTHER RETIREMENT PLAN?
10. ARE VIP ASSETS EXEMPT FROM THE CLAIMS OF CREDITORS?
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?
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?
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.