412(e)(3) Fully Insured Plans

Classification B, legitimate, commonly abused. Real tax law with a real benefit. Promoters break it.

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.

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.

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

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

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?

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