A common question among employers considering a 412(e) plan involves interest rates. Considering the stock market resurgence over the last few years, the low rate of return on fixed annuity products seems like a huge obstacle.
To the contrary, this is the feature that makes the plans attractive. A low rate means a high funding target, since value and rate move in opposite directions. In turn, a high funding target requires higher than usual annual funding (and deduction). For businesses and/or individuals with high marginal income tax rates, this can mean significant current tax relief. Hence, astute 412(e) plan sponsors are more than willing to accept low interest rates in combination with high tax relief. Instead of gains coming from uncertain market returns, they come from more certain current income tax relief.
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