Direct Recognition Variable Investment Plan (VIP) FAQs
Frequently Asked Questions
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.
WHAT DOES DIRECT RECOGNITION MEAN? A: It means that a participant’s benefit is credited with the actual investment performance of the plan.
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.
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.
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.
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.
ARE EMPLOYER CONTRIBUTIONS TO A VIP PLAN TAX DEDUCTIBLE? A: Yes.
DO VIP ASSETS ACCRUE ON A TAX DEFERRED BASIS? A: Yes.
CAN A VIP PARTICIPANT’S BENEFIT BE ROLLED OVER TO AN IRA OR OTHER RETIREMENT PLAN? A: Yes.
ARE VIP ASSETS EXEMPT FROM THE CLAIMS OF CREDITORS? A: Yes.
IS THERE A CONTRIBUTION LIMIT? A: Yes, the same limit that applies to cash balance and traditional defined benefit plans.
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.
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.
ARE VIP CONTRIBUTIONS AFFECTED BY INVESTMENT PERFORMANCE? A: No.
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.
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.
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.
IS THERE A LIMIT TO HOW MUCH INVESTMENT RETURN (OR LOSS) CAN BE CREDITED TO VIP PARTICIPANT BENEFITS? A: No.
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.