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412(e)(3) Defined Benefit Plan

A 412(e)(3) plan (formerly called 412(i)) is a defined benefit qualified retirement plan, often referred to as a fully insured plan because its investments are restricted to guaranteed annuities and life insurance policies. Benefits are guaranteed by the life insurance company, 412(e)(3) plans require larger initial deductible contributions than a traditional pension plan since the funding assumptions are much more conservative.

Benefits of a 412(e)(3) Defined Benefit Plan

A 412(e)(3) plan represents one of the few ways to pay life insurance premium pre-tax. A business owner establishes a 412(e)(3) for himself/herself and his/her employees. Then the owner makes tax-deductible contributions to the plan. These contributions are used to purchase annuities and possibly life insurance policies.

Transamerica's interest-sensitive whole life insurance policy, TransSecure II or TransSecure II NY, can be used to fund the life insurance component of 412(e)(3) plans.1

Why 412(e)(3)?

A 412(e)(3) plan provides a number of benefits which is:

  • Provides a current income tax deduction and income tax deferral on growth of plan assets.
  • Always fully funded. The 412(e)(3) plan's structure ensures that it is never under funded, as can be the case with traditional defined benefit plans. Additionally, the risk of investment under performance is shifted to the insurance carriers.
  • Easy to understand. On a 412(e)(3) plan statement, what you see is what you get since the values are always guaranteed.
  • A completion benefit. When a 412(e)(3) plan includes life insurance, there is a self-completing element to the plan. If the insured participant dies while participating in the plan, the death benefit can replace his or her current earnings and offer valuable protection to the family.

Prospects

  • Highly paid business owners/professionals looking for guaranteed retirement benefits
  • Small, closely held businesses
  • Companies with few or no common-law employees
  • S corporation owners
  • Stable companies with little fluctuation in profits
  • Those who like security and guarantees over a fluctuating stock market with no guarantees

1 TransSecure® II is a non-participating, limited payment interest sensitive whole life insurance policy issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499. Policy Form No. ICC08-180; Group Certificate No. 2-18036108 for certificates issued under a group policy issued to the Rhode Island National Consumer Protection Trust. Policy form and number may vary and this policy may not be available in all jurisdictions. TransSecure® II NY (Policy Form #3-18038108) is a nonparticipating, limited payment, interest-sensitive whole life insurance policy issued by Transamerica Financial Life Insurance Company, Harrison, NY 10528. This policy is available only in New York.

Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively "Transamerica"), and its representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.

OLA 1415 0513