Own Your Own Business?

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• Employee Contributions: Employees can contribute a portion of their salaries, subject to annual IRS limits.
• Employer Contributions: Employers may offer matching contributions or additional employer contributions within applicable limits.
• Tax Advantages: Traditional employee contributions and qualifying employer contributions receive tax advantages under applicable rules. Own your own business? You can do both!
• Investment Performance: 0% Floor options means your money if protected from crashes! 
• Retirement Income: Retirement income depends on the account balance and how funds are withdrawn or invested.

• Higher Potential Employer Contributions: Depending on the owner's age, compensation, benefit formula, and plan design, allowable pension contributions may substantially exceed those available through a 401(k) alone.
• Tax-Deductible Employer Funding: Qualifying employer contributions are deductible within applicable IRS limits.
• Defined Retirement Benefits: The plan establishes a retirement benefit formula rather than relying solely on an individual investment account balance.
• Insurance-Backed Guarantees: Qualifying annuity and life insurance contracts provide contractual guarantees according to their terms and the insurer's claims-paying ability.
• Predictable Funding Structure: Contributions are determined using actuarial calculations and the plan's funding requirements.
• Employee Retirement Benefits: Eligible employees can benefit from the employer-sponsored pension arrangement, subject to plan terms and applicable participation rules.

One of the primary advantages of a Section 412(e)(3) pension plan is the potential to make larger deductible employer contributions than a business could make under a 401(k) alone.

A traditional 401(k) is subject to defined-contribution limits. A defined benefit pension plan follows different rules based on the maximum permitted retirement benefit and the actuarial cost of funding that benefit.

For business owners this difference can create a significant retirement funding opportunity.

Consider a hypothetical business comparing two annual employer contributions:

• 401(k) employer contribution: $30,000
• 412(e)(3) pension contribution: $100,000
• Additional potential deductible contribution: $70,000

Assuming the full contributions are deductible and the business can use the deductions at a 30% marginal federal tax rate:

• Tax reduction associated with a $30,000 contribution: $9,000
• Tax reduction associated with a $100,000 contribution: $30,000
• Difference in illustrative federal tax reduction: $21,000

This example is for illustration only. The $100,000 pension contribution is not a universal limit or a guaranteed allowable amount. Actual contributions depend on actuarial calculations, the plan's benefit formula, participant demographics, compensation, and applicable tax law.

 The actual tax savings may also differ depending on the business's tax structure, state taxes, and ability to use the deduction.

 A properly designed Section 412(e)(3) pension plan can offer multiple layers of protection. The exact protections depend on the plan documents, insurance contracts, applicable federal law, and state law.
 

Qualifying annuity and life insurance contracts provide guarantees according to their terms. These guarantees depend on the premiums being paid as required and the insurance company's ability to meet its contractual obligations.

Where the Employee Retirement Income Security Act (ERISA) applies, federal law establishes standards for plan administration, fiduciary responsibilities, participant disclosures, and reporting. Participants also have certain legal rights and remedies.

Qualified retirement plans generally receive significant protection under applicable federal law. ERISA-covered plans generally include restrictions on the assignment or garnishment of benefits, subject to exceptions such as qualified domestic relations orders and certain federal collection actions. The precise protection depends on the circumstances and applicable law.

Unlike a 401(k), which provides a retirement account balance based on contributions and investment performance, a defined benefit pension plan promises a retirement benefit determined by its formula and terms. In a qualifying 412(e)(3) arrangement, eligible insurance contracts fund the promised benefits according to the applicable requirements.

Insurance companies are subject to state regulation and solvency requirements. Depending on the state and policy, a state insurance guaranty association may provide limited protection if an insurer becomes insolvent. Such protection is subject to statutory conditions and limits and should never be represented as unlimited coverage.

Section 412(e)(3) plans must meet specific requirements concerning qualifying insurance contracts, premium payments, funding, and other applicable pension-plan rules. Proper administration is essential to preserving the intended tax treatment.