A 412(i) 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(i) 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, career professional
with significant outside income and/or independent contractor with no employees.

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.
  

What are the advantages of a 412(i) insurance contract plan over a ” traditional defined benefit plan ?

A 412(i) 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 ;
  
•        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.
  
• CLICK HERE to read more advantages when life insurance is used in a qualified plan.
  

What requirements must be met to qualify as a 412(i) insurance contract 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 year’s plan
contribution;and
No policy loans are allowed under the contract.

How does the initial deductible contribution required in a 412(i) plan compare to a traditional defined
benefit plan ?

Generally, a plan funded with only annuity contracts may DOUBLE the deductions allowed under a
traditional plan.  A plan funded with both annuity an the maximum life insurance allowed may TRIPLE the
deduction allowed in a traditional defined benefit plan. Attached is an illustration of the maximum first
year deductible contribution to a 412(i) plan.

Are 412(i) plans new to the retirement planning marketplace ?

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 « gray area » of the law and are, in fact, a very conservative
approach to retirement plan funding.  All of the benefits are guaranteed by an insurance company.

Where do you go to find a 412(i) plan ?

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 that market and administer small business retirement plans so there are very few
companies that market 412(i) plans.  This is why most CPAs and business owners are unfamiliar with
412(i) plans.  Jamaal Wilkes Financial Advisors, LLC (JWFA) is strategically aligned with leading
providers of 412(i) plans, and other retirement plans for small businesses, at no additional cost.

Why does JWFA market these plans ?

We believe retirement planning for small business is a market that is under-served.  We specialize in
retirement planning for small business owners and individuals along with investment management.  We
are strategically aligned with providers who design, administer and fund retirement plans for small
businesses.  It is, therefore, natural that we market these 412(i) plans.  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
nowhere else  to turn but to a 412(i) fully insured plan.

What products are utilized for 412(i) plans ?

Generally, a Whole Life product and a Life Paid Up at 65 as well as both an individual and group fixed
annuity are used for 412(i) plans.

Do the contributions remain level forever ?

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 costs to administer these 412(i) plans ?

Approximate costs are $200 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 cost of $600 to provide full administration ($500 if a one
person plan).  The full administration includes all Internal Revenue Service and Department of Labor
forms along with required plan valuation and 5500 forms.  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 most recent tax law (Economic Growth and Tax Relief Recovery
Act, or EGTRRA) allows a 50% tax credit for the first three (3) plan years for administrative expenses (up
to the first $1,000 of expenses).

How do you get a FREE feasibility quote with no obligation?

JWFA will provide a FREE feasibility quote to see if a plan fits your situation.  All we need from you is to
complete and return to JWFA the attached CENSUS of all employees in your business.

Who is the best company profile for this type of plan ?

Generally, it will be a business with 5 or less employees where the owner is 45+ years in age, the oldest
of the employees and earns a very high and consistent income.  A career professional with significant
outside " moonlight " income is also a good prospect.  The ideal prospect is an independent contractor
with significant income and no employees.         

412(i) Plan Frequently Asked Questions (FAQs)