S—412(e)(3) Plans

A 412(e)(3) plan is a defined benefit plan that is funded by life insurance and annuities. to the Pension Protection Act of 2006, these plans were governed by IRC Section 412(i) and are, therefore, sometimes promoted as 412(i) plans. These plans provide high-earning business owners who have stable cash flow an opportunity to make maximum deductible retirement contributions while offering a high degree of security to plan participants.

PLAN REQUIREMENTS. 412(e)(3) plans are subject to all the requirements that apply to other defined benefit plans, including nondiscrimination, vesting and benefit limitations. (For example, the plan must generally include all full-time non-union employees, except for employees younger than 21 and those with less than one year of service.) In addition, they must generally meet the following six additional requirements: (1) the plan must be funded exclusively by life insurance policies and/or annuities guaranteed by a state licensed insurance company; (2) contracts must have level premiums; (3) benefits must be provided entirely by these contracts; (4) premiums must be paid without lapse; (5) contract rights cannot be subject to a security interest; and (6) no policy loans are allowed.