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Defined Benefit Retirement Plans

Frequently Asked Questions

A 412 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 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
• More stability in the contribution level,
• Simpler plan administration, and
• A secure promise of future benefits guaranteed by an insurance company.

A 412 insurance contract plan:

• Does not require an enrolled actuary;
• Is not subject to the full funding limitation tests of a defined benefit plan;

• Is required to use the contract guarantees as funding assumptions, thus shielding them from IRS attack as unreasonable funding assumptions;

• Can be designed to eliminate the potential of excess plan assets that, in a traditional plan, would 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 participants 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.

The major requirements under Section 412(i) of the Internal Revenue Code are:

• The plan must be funded exclusively with annuity products, or a combination of life insurance and annuity products, issued by an insurance company.

• The benefits provided each individual must be equal to the values provided in the contracts and guaranteed by the insurance carrier.

• Life insurance dividends and excess annuity interest must be used to reduce the following years plan contribution.

• No policy loans are allowed under the contracts.

See the appendix page that compares the first year contribution levels for a traditional defined benefit to a 412 Split Funded Defined Benefit Plan. These contribution levels are shown from ages 45 to 65. Comparisons are made for plans funded entirely with a combination of annuity and the maximum amount of life insurance available under the incidental insurance rules for qualified plans. A plan funded with both annuity and the maximum life insurance allowed may TRIPLE the deduction allowed in a traditional defined benefit plan.

No. These plans have been around since ERISA (in 1974) or even before. They were referred to as fully insured defined benefit plans. In past years, before the demise of retirement endowment contracts, they were fully funded with a retirement endowment contract issued with a face amount equal to 100 times the normal retirement benefit. They are not a grey area of the law and are, in fact, a very conservative approach to retirement plan funding. All benefits are guaranteed by a highly rated insurance company.

Generally, you will go to an insurance company that sells these types of plans. The funding must be in insurance company products and the company must guarantee the benefits. There are very few insurance companies who market and administer small business retirement plans so there are very few companies that market 412 Split Funded Defined Benefit plans. That is why it is a plan that is somewhat unfamiliar to most CPA's and small business owners.

We believe it is a market that is under-served. We specialize in the small business retirement plan market place It is, therefore, natural that we market 412 Split Funded Defined Benefit Plan . These are specialized plans that create large deductions. In the right situation, there is no other plan that will meet the needs of the small business owner. If a traditional defined benefit plan does not create sufficient deductions, there is no where else to turn but to a 412 Split Funded Defined Benefit Plan fully insured plan.

Whole Life product which was modified to fit this market and we have both an individual and group fixed annuity for this marketplace.

The contributions will gradually decrease since the excess interest earned over the guaranteed rate must be used to reduce the following year's contribution. The dividend payable on the life policy will also be used to reduce the following year's contribution. However, if the deduction decrease becomes a problem, it is likely the plan benefit can be increased to compensate for that since the maximum benefit levels are subject to annual cost of living increases declared each year.

What are the administration charges?

Generally from a $200 to $400 charge to establish the plan which includes providing the plan and trust document and providing the plan trustee with a manual including all documents and administrative forms that may be needed in the future. Annually, there is a $700 - $850 to provide full administration fee. The full administration includes all IRS and DOL forms and the plan valuation and 5500 forms required. The forms will be prepared and ready for the trustee to sign and mail each year to the proper government agency. Note that for new plans established in 2002 and thereafter, the new tax law (EGTRRA) allows a 50% tax credit for the first three plan years for administrative expenses (up to the first $1,000 of expenses).

We will provide a FREE feasibility study to see if a plan fits your situation. All that is needed from you is a census of all employees of the firm. Please use our ON-LINE FORM to get things rolling!