Questions and Answers About 412(e)(3) Defined Benefit Plan
Questions and Answers
Q. What is a 412(e)(3) defined benefit plan?
A. A 412(e)(3) plan is a type of retirement plan that guarantees a specific amount of income for the future. The plan is funded using life insurance and/or fixed annuities. Because it’s funded this way, the contribution calculations follow specific rules under the IRS code and don’t require complicated actuarial work. This is why it’s also called a "Fully Insured Plan" or "Insurance Contract Plan."
Q. Why would a business owner adopt a 412(e)(3) plan?
A. A 412(e)(3) plan can be a great option for business owners who want a simple and reliable way to save for retirement. It allows you to achieve your retirement goals without the risk of losing money due to market fluctuations, as the contributions are guaranteed by insurance products. It’s a stable and secure option for those who want peace of mind in their retirement planning.
Q. Who can adopt a 412(e)(3) plan?
A. Any type of business can set up a 412(e)(3) plan, including sole proprietors, partnerships, corporations (both C and S), and limited liability companies (LLCs). However, it’s important that the business has stable income, as inconsistent revenue could make it harder to fund the plan.
Q. How do I evaluate a 412(e)(3) plan for my business?
A. To assess if a 412(e)(3) plan is right for you, your representative will gather information about your business, like employee data and your retirement goals. Based on this information, a proposal will be created to show how the plan can meet your objectives and funding needs. It’s a straightforward process that helps you see if this plan is a good fit for your business.
Q. Who is included in a 412(e)(3) defined benefit plan?
A. To be eligible for a 412(e)(3) plan, employees must be at least 21 years old and have worked for the company for at least one year, with a minimum of 1,000 hours of service during that time. Once they meet these requirements, they are included in the plan.
Q. How do I know when an employee is eligible and how much to contribute?
A. A retirement plan service provider will help keep track of employee eligibility and the required contributions. For example, the Lafayette Life Insurance Company provides this tracking service, making it easy to manage.
Q. Do 412(e)(3) plans have a vesting schedule?
A. Yes, 412(e)(3) plans do have a vesting schedule. This means that employees must work for the company for a certain amount of time (usually around six years) to become fully vested, or entitled to the full benefit. If an employee leaves the company before reaching full vesting, any non-vested portion of their account will be forfeited and remain in the plan.
Q. How do I fund a 412(e)(3) defined benefit plan?
A. A 412(e)(3) plan is funded using annuities and life insurance, or just annuities. The key benefit is that the plan guarantees the retirement benefits as long as the annual premiums are paid on time. This gives both the business owner and employees peace of mind knowing that the retirement income is secured.
