Prof. Beckett G. Cantley
John Marshall Law School
Atlanta, GA


The 2001 Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) established different limits on the amount of tax-deductible contributions permitted under different types of retirement plans, including defined-benefit plans (“DBP”). A DBP is a qualified plan that requires the use of a pre-determined formula to set the amount of income that a DBP participant will receive from the DBP upon retirement. A traditional DBP has an annual determination of the amount of income that can be contributed on a tax-deductible basis to the DBP to fund the future target retirement plan amount. The annual amount of permissible tax-deductible contributions is determined by qualified actuaries who apply formulas as outlined in the somewhat complex regulatory requirements of EGTRRA. One form of DBP permits a significantly higher annual contribution than the traditional DBP – the Internal Revenue Code (“IRC”) 412(e)(3) plan

The Insurance Funded DBP

IRC 412(e)(3) plans are exempt from the general DBP funding limits set by the IRC. Essentially, the IRC 412(e)(3) target retirement is fully funded by life insurance.   As a result of the life insurance funding, the responsibility for attaining the target-funding amount is borne by the insurance company, instead of the employer. An IRC 412(e)(3) plan (also known as a “fully insured” plan) is funded by insurance products such as fixed-annuities and/or whole-life insurance.

The guaranteed interest-rate and mortality assumptions of the life insurance determine the size of the annual tax-deductible contributions. The interest-rate assumptions are much more conservative in IRC 412(e)(3) plans, which is one of the principal reasons for the increase in the size of annual tax-deductible contributions. IRC 412(e)(3) plan annual tax-deductible contributions have the potential to eventually decrease over time if the assets contributed toward the plan earn dividends or interest over and above the guaranteed levels.  If this occurs, the over funded portion of the earnings must be used to offset contributions.

The accrued benefit for a IRC 412(e)(3) plan participant at retirement age is a stated monthly pension payment amount equal to the guaranteed cash values of the underlying insurance policy (or policies). Since the insurance policy (or policies) has these guaranteed amounts, IRC 412(e)(3) plans provide for a much more certain retirement benefit.  The retirement payout of an IRC 412(e)(3) plan is still subject to the identical IRC limitations as a traditional DBP.  An additional benefit of the IRC 412(e)(3) plan over a traditional DBP is that the life insurance policy face amount will be there for the participant’s family in the event that the participant dies prematurely.  IRC 412(e)(3) plan funds also can have asset protection as a feature.


Reduced Administration Burden


An IRC 412(e)(3) plan has the added benefit of reduced administrative burdens over a traditional DBP.  First, an IRC 412(e)(3) plan does not require the certification of an enrolled actuary.  Second, participants need not make traditionally required quarterly contributions to the plan.  Thirdly, IRC 412(e)(3) plans do not have any full funding limitation that restricts annual contributions.  Lastly, the administrative expenses for IRC 412(e)(3) plans are often significantly reduced over traditional DBP plans.

As with a traditional DBP, an IRC 412(e)(3) plan is created and administrated by a third-party administrator (“TPA”).  The TPA additionally files an annual IRS Form 5500, as well as all other required documents with the IRS and the US Department of Labor.




Many small business owners have experienced a significant loss of retirement savings as a result of the current prolonged financial crisis in the US.  The IRC 412(e)(3) plan offers such small business owners the opportunity to catch up their retirement savings quickly on a tax-deductible basis.  The administrative expenses and burdens can be significantly reduced as well.  Moreover, should the participant die un-expectantly, the life insurance benefit is a significant benefit to the family.  Lastly, IRC 412(e)(3) plans may be significantly asset protected from creditors of the participant.