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Chiropractic News

June 2008

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Lifetime guarantee! Fully insured plan gives you a retirement option

Life hands out few guarantees:
Death and taxes are two, and neither is very positive. Wouldn’t it be wonderful if you had another guarantee — specific amount of money you could count on when you retire?

Social Security is not that guarantee. But there is one —  412(i) plan.


A 412(i) plan, also known as a fully insured plan, is a type of defined benefit pension plan that is funded exclusively by life insurance, annuity contracts or a combination of the two.

These plans are growing in popularity, largely because of tax law changes and an unpredictable stock market.
Prior to December 31, 1999, Section 415(e) of the Internal Revenue Code mandated that defined benefit plans and defined contribution 401(k) plans had to be grouped together. The rule linked — and also limited — the amount an employer could fund between the two plans.

With the repeal of Section 415(e), an employer could fully fund both a defined benefit plan and a defined contribution plan. The 2001 tax bill increased the retirement benefit from $125,000 to $160,000 per year.
Additionally, a sluggish economy and the uncertainty of the stock market have changed investment strategies. Investors no longer focus on the highest return on their investment. They just want to ensure the return of their investment.

Despite a rebounding market, investors remain nervous about the long-term outlook. And as they move closer to retirement, they want to neutralize the market’s impact on their retirement goals. Because of their guaranteed retirement benefit structure, 412(i) plans are providing that neutralizing effect.


This type of fully insured retirement plan has a number of benefits for small employers:

• Bigger contribution levels. Perhaps the most important benefit of 412(i) plans to small business owners is that these plans allow significantly greater contribution levels than a regular defined benefit plan or a normal 401(k) plan.

For example: You may be able to contribute up to $300,000 each year — substantially higher than the $40,000 maximum that can be put in a defined contribution plan.

That difference can be significant if you find that you have a much smaller retirement nest egg due to the downturn in the stock market. If you previously had $2 million in your plan and now it’s $1 million; you need to put at least $100,000 a year back into the plan to return it to where it needs to be. With the normal defined contribution or 401(k) plan, that’s not possible.

• Funded to meet goals. Funding for a 412(i) plan is calculated the opposite of funding for a defined contribution plan. With a defined contribution plan, you can contribute up to $40,000 annually and at the end of the specified period of time, the balance (depending upon earning and/or loss) is yours.

But you have no certainty of what the outcome of your

investments will be. When a 412(i) plan is set up, the small business owner decides how much he or she wants to receive annually upon retirement, up to the maximum allowed, and the plan is funded to meet that goal.

The only risk employers could potentially face is the risk of not earning as much return as they could elsewhere. However, because an employer’s contributions to a 412(i) plan are tax-deductible, the ability to receive an income tax deduction of up to $300,000 annually more that offsets the plan’s more conservative investment strategies.

• Smaller administration costs. Another benefit of 412(i) plans is that they are generally easier and less expensive to administer than many other types of retirement plans. No actuarial certification is required on a 412(i) plan so there are no direct actuarial fees. As a comparison, administration costs for a 412(i) plan would generally be less that $1,000. For a tradition defined benefit plan the costs could be between $3,000 and $5,000, or three to five times the expense of a 412(i).

• Disability benefits. In addition, because 412(i) plans are normally funded with a mixture of life insurance and annuity contracts, they can provide for disability benefits. If the life insurance piece of the plan has a waiver of premium built into it, a portion of the funding would continue through retirement age should the employer become disabled.


When should a small business owner make use of a 412(i) plan? Consider the following checklist as a guide.

A 412(i) plan makes sense if:

• You or a key employee is at least 45-years of age;

• You or a  key employee wants and/or needs to maximize his or her contributions;

• The business has consistent cash flow to benefit from the large tax deduction.

• To qualify as a 412(i), plans must be funded exclusively with guaranteed products, usually annuity contracts or a combination of life insurance and annuities. The contracts must provide for level annual premium payments until the retirement of employees. 412(i) plans are available no matter what type of business structure the employer has, whether a corporation, a  sole proprietorship, a partnership, or an LLC.


412(i) plans can be a solid, viable component of a retirement plan no matter what the market conditions.

Many employers still have a 401(k) or profit sharing plan that is invested in bonds and stocks but are adding the 412(i) as the guaranteed investment piece. The reality is that retirement investments, as with all investments strategies, should be properly diversified. And if you’re going to diversify, why not invest in one of the few guarantees life has to offer?

Mark Papalia, CLU, ChFC, CFP, is president and founder of Papalia Financial Services ( in Danville, Penn. He can be contacted at

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