Stock market inconsistency and global economic uncertainty have created the need for guaranteed investments. People not only want to choose their retirement lifestyle, they want to make sure they can realize it. That’s how the 412(e)(3) Plan can help. It is a plan guaranteed to provide a predictable revenue stream, so you can enjoy the lifestyle you desire.
The 412(e)(3) Plan
The 412(e)(3) Plan is a defined benefit retirement pension plan guaranteed with insurance company life and annuity contracts. Introduced in 1974, it is also referred to as a “Fully Insured Defined Benefit Plan”. Unlike traditional defined benefit plans, the 412(e)(3) Plan invests exclusively in permanent life insurance and/or annuity contracts with guaranteed rates of return.
Who is the plan for?
Any employer can adopt the 412(e)(3) Plan, including: Sole proprietors, C Corporations, S Corporations, Partnerships, Limited Liability Companies, and Family Limited Partnerships. It is best suited for the owner of a small business or professional enterprise looking to maximize current tax deductions and secure a large amount of retirement funds. The 412(e)(3) Plan is an excellent option for single employee businesses, maximizing tax-deductible contributions and minimizing W2 income.
The 412(e)(3) Plan takes the risk risk out of retirement investing. Funds are guaranteed by insurance company contracts, avoiding the ups and downs of the stock market. The Plan can never suffer any losses or be under-funded. It provides the largest tax deductions of any qualified retirement plan – you can invest more and accumulate more for retirement. 412(e)(3) permits employers to “fast fund” a retirement program for an older employee without increasing costs for younger employees. Plans must be funded each year, but you can design the 412(e)(3) Plan with a contribution rate at the level you are comfortable with. Contributions to the Plan may be as much as 3 times that of a traditional defined benefit plan and 6 times more than a defined contribution plan. The 412(e)(3) Plan provides maximum flexibility for exit strategies, including roll over into an IRA, lump sum distributions and guaranteed monthly income, while providing maximum security for retirement. The Plan is protected from creditor claims and can be amended or terminated to accommodate changing family or business needs.
Employer contributions to the 412(e)(3) Plan are tax deductible, employee benefits are tax deferred and all accumulations grow tax-free. If a company already has a 401(k) plan in place, it can retain the employee contributions to that plan and still adopt the 412(e)(3) Plan. The participant may elect to continue the permanent life insurance benefit after retirement. With proper planning, death benefits may not be subject to estate tax is not intended as legal or tax advice regarding the treatment of any particular employer’s contributions to its plan or the treatment of benefits provided to the employees of any particular employer. A taxpayer should consult its independent tax or legal adviser before adopting its own 412(e)(3) Plan.
A Look at the numbers…
Why The Safe Harbor Group?
Easy to Understand
Unlike other defined benefit plans, a 412(e)(3) defined benefit plan’s benefit is always equal to the value of the annuity or life insurance contracts purchased for each participant. Hence, the value of the accrued benefit is easy to understand.
Easy to Administer
Traditional defined benefit plans must abide by complex funding rules and be certified by an Enrolled Actuary each year. A 412(e)(3) defined benefit plan can be simpler to administer and requires no actuarial certification.
Always Fully Funded
Because the cash surrender value of the underlying contracts equals the benefit at all times, a 412(e)(3) defined benefit plan is always fully funded if the required premiums are paid.
Unlike Plans that may place assets into volatile financial instruments, a 412(e)(3) defined benefit plan is required to be funded solely by guaranteed, level-premium annuity and life insurance contracts. There is no market risk for the plan trustee.
After salaries and wages, taxes are usually the largest expenditure for small businesses. 412(e) (3) defined benefit plans help owners with a tax deduction for employee contributions, plus a tax deferred retirement contribution for themselves.
Because the benefit cannot be assigned, monies in qualified plans can be protected from creditor claims. This protection was extended to all qualified pension plans by the Bankruptcy Abuse and Consumer Protection Act of 2005.