Promoter structures library
412(e)(3) Fully Insured Plans
Sold as: "412(i) plan", "fully insured defined benefit plan", "the biggest deduction in the code"
The plan type is real. Overfunding it and using springing-value policies is what got listed.
Classification B. Real tax law with a real benefit. Promoters break it.
The pitch
The biggest deduction in the code. A fully insured defined benefit plan funded entirely with level annual premium annuity or insurance contracts, with contributions far larger than a profit sharing plan allows.
Start here
The plan design is REAL and statutory. The ABUSES are listed transactions.
Where it breaks
Not the plan design, which is statutory. The overfunding. Premiums exceeding what is needed to fund the stated benefit, death benefits more than 100,000 dollars above the plan's own, and springing cash value policies distributed to the owner at an artificially depressed surrender value are the three patterns Rev. Rul. 2004-20, Rev. Rul. 2004-21, and Rev. Proc. 2005-25 reach.
What it costs you if it is wrong
The abuses here are listed transactions, and because they are pre-AJCA they survived the IRS's 2024 concession and remain fully enforceable. Form 8886 is required, Sec. 6707A reaches a failure to file it, and a reportable transaction understatement carries Sec. 6662A at 20 percent, or 30 percent if not adequately disclosed. The excess premium deduction goes as well.
Red flags specific to this structure
- The premium exceeds what funds the stated benefit
- The policy has a springing cash value
- The death benefit exceeds the plan's own by more than 100,000 dollars
- The plan is presented as a deduction rather than a retirement benefit
- The policy is to be distributed to the owner at its depressed surrender value
Questions to ask the person selling this
Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.
- 1Does the premium exceed what is needed to fund the stated benefit?
- 2Does the policy have a springing cash value?
- 3Does the death benefit exceed the plan's own by more than 100,000 dollars?
- 4How will the policy be valued if it is distributed to me?
- 5What is the actuarial purpose here, apart from the size of the deduction?
Which of the Seven Markers this trips
A promised deduction or savings multiple
The promoter selects the appraiser or the actuary
The legitimate version
A genuinely fully-insured defined benefit plan funded exclusively with level annual premium annuity or insurance contracts.
What distinguishes it
- Premium equals the amount needed to fund the stated benefit
- Benefits within Sec. 415(b)
- Incidental death benefit limits respected
- No springing values
- Policy valuation at distribution uses fair market value per Rev. Proc. 2005-25
- Nondiscrimination and coverage genuinely tested
- A real actuarial purpose, typically an older owner with few employees seeking very large deductible contributions
Holding one of these, or being pitched one?
The diagnostic work is worth doing before the return gets filed rather than after. That is a conversation, not an engagement.
Schedule a complimentary consultationTake this into the meeting: the one-page brief
Statutes, regulations, and rulingsthe authority behind everything above
The listed abuses
- Rev. Rul. 2004-20 Situation 1: premiums exceeding the amount needed to fund plan benefits, absent surrender charges. Listed Feb. 13, 2004.
- Rev. Rul. 2004-20 Situation 2: death benefits exceeding plan-provided death benefits by more than 100,000 dollars
- Rev. Rul. 2004-21 and Rev. Proc. 2005-25: SPRINGING CASH VALUE policies with artificially depressed surrender values distributed to the employee cheaply, then springing up
A note on the 2004 cutoff
These are pre-AJCA and therefore survive AOD 2024-01. Fully enforceable.