A 412(e)(3) defined benefit pension plan, referred to in IRS regulations as an “insurance contract plan,”
is the only defined benefit plan that is exempt from the minimum funding requirements of Section 412(e)(3) of the Internal Revenue Code. This type of plan, therefore, enjoys certain advantages over the traditional defined benefit plan and is worth exploring if you are the owner of a small business.
These advantages create a plan that, compared to a traditional defined benefit plan, will produce:
- Larger initial deductions;
- Greater stability in the contribution level;
- Simpler plan administration, and
- A secure promise of future benefits.
What Are The Advantages Of A 412(e)(3) Insurance Contract Plan Over A Traditional Defined Benefit Plan?
- Does not require an enrolled actuary;
- Is not subject to the full funding limitation tests of a defined plan;
- Is required to use the contract guarantees as funding assumptions, thus helping shield them from IRS attack as unreasonable funding assumptions;
- Can be designed to eliminate the potential of excess plan assets that, in a traditional plan, could be subject to taxes and penalties of 80% or more upon termination of the plan;
- Produces an understandable accrued benefit since it is simply the cash value of the contracts funding the participant’s account;
- Creates larger initial deductions than a traditional plan since the funding assumptions are required to be much more conservative; and
- Provides retirement benefits that are guaranteed by the insurance company and not just the financial strength of the particular employer providing the plan.
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