Retirement Insights
Achieve Tax Savings & Wealth Building with DR-VIP
May 2, 2024
Companies looking for larger tax-deductible contributions and boosted retirement savings for their owners and professionals need to look no further than a Direct Recognition Variable Investment Plan (DR-VIP).
As an integrated defined contribution (DC) and defined benefit (DB) plan, a DR-VIP is designed to optimize benefits, mitigate risk, increase tax-deductible contributions and minimize costs.
Plan Design Offers Numerous Advantages
The unique design allows owners, partners and key stakeholders to achieve their goals without having to wrestle with the challenges of typical DB plans. USI Consulting Group’s (USICG's) DR-VIP leverages the best features of DC and DB plans:
- Substantially higher tax-deductible contributions1 when integrated with 401(k) and a profit-sharing plan. Because part of the plan design is a DB plan, the tax-deductible contributions are much greater – can exceed $300,000 per person.2
- Participant benefits increase or decrease in direct relation to the plan’s investment returns which mitigates the underfunding risk associated traditional DB and cash balance plans.
- As a qualified plan3, the DR-VIP assets are exempt from creditor claims. This plan design allows companies to build assets that are tax-advantaged and protected from creditor claims.
- DR-VIP contributions are much more known, consistent and reliable. As a result, companies are able to budget for their contributions and can rely on that annually. If the market is down, there’s no worry that additional contributions will need to be made.
- DR-VIP assets can be invested according to the company’s overall investment objectives to optimize returns, while 401(k) plan investments continue to be participant-directed.
- Every plan is submitted to the Internal Revenue Service (IRS) for a favorable determination of the plan’s tax qualification. USICG’s DR-VIPs are submitted to the IRS and our clients receive a determination letter that states the plan is approved and qualified.4
- The plan design provides for the daily valuation of DC and DB plans. Participants find this to be a key advantage, as they can review the value of their benefits as of the previous business day’s close.
- Participants have online access to their DR-VIP benefits and 401(k) account through a single sign-on.
The DR-VIP Difference
The significant difference between a DR-VIP and other traditional DB and cash balance plans is that the benefits accrued under a DR-VIP are defined in terms of “units” and a “unit value” (which fluctuates depending upon the actual investment performance of the plan’s assets).
Other types of DB plans either define their benefits in terms of a formula which provides a fixed monthly benefit or a hypothetical account balance which grows with a defined interest crediting rate. Investment performance is independent of benefit growth in these types of plans.
DR-VIP participant benefits are equal to the value of units they have accrued under the plan, similar to owning shares of a mutual fund. If the underlying value of plan assets increases or decreases, the value of each unit increases or decreases accordingly. As a result, the benefits that are payable to participants under the DR-VIP automatically adjust (increase or decrease) in direct relationship to the actual performance of the plan’s assets.
Achieve Tax Savings & Wealth Building with a Direct Recognition Variable Investment Plan
We hosted an informative webinar discussing the benefits of a DR-VIP and how this forward-thinking retirement plan provides higher tax-deductible contributions and optimizes benefits for professional firms and businesses.
If you missed it, you can watch the recording to learn more.
Case Study: DR-VIP proves advantageous for law firm
Working with USICG, a mid-sized Manhattan law firm accomplished several important objectives when it implemented a DR-VIP.
The firm set the following goals for the new plan:
Maximize partner retirement benefits for its nearly two dozen partners
Minimize additional staff costs
Eliminate underfunding risk
Maximize investment flexibility
Over $1.6 million additional partner retirement contributions
$150,000 additional staff contributions
Underfunding was eliminated as plan liabilities are tied to plan assets
Plan assets can be invested in accordance with the firm’s objectives
Plan contributions are known, consistent and reliable
Contribution breakdown has improved to 91.7% for partners and 8.3% for office staff
How USI Consulting Group Can Help
USICG’s integrated team will collaborate with your organization to create a tailored retirement plan that accomplishes your goals to maximize tax deferrals and retirement savings and minimize staff cost, with the constraint of satisfying all IRS nondiscrimination testing requirements.
To learn how we can help you, please contact your USICG representative, visit our Contact Us page or reach out to us at VIPNewBizSupport@usi.com.
1 IRS Code Section 401(a)(13).
2 Determined by individual participant age and other factors.
3 As defined under IRC Section 401(a) and IRS Regulation 1.411(a)(13)(d)(6).
4 The submission, made on behalf of each individual plan, is an application for a letter of favorable determination of the plan’s tax qualification.
5 Actual results will vary. The use of any stated benefits in this case study is intended for illustrative purposes only and may not be used to predict or project future results.
Investment advice provided to the Plan by USI Advisors, Inc. Under certain arrangements, securities offered to the Plan through USI Securities, Inc. Member FINRA/SIPC. Both USI Advisors, Inc. and USI Securities, Inc. are affiliates of USI Consulting Group.
This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional. | 1023.S0929.0073
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