Closely-held Business Owners: Maximum retirement savings ‘secrets’

October 25, 2022

2 minute read – Wealth accumulation and retirement savings become more important as businesses prosper and owners begin dreaming of retirement, especially once they’re in their 50’s. Maximizing tax deferred savings is crucial. One ‘secret’ solution to consider is the 412(e)(3).

What are 412(e)(3) defined benefit plans and why isn’t everyone talking about them? It may surprise you to know that 412(e)(3) defined benefit plans have been around for over 50 years. Two factors that have contributed to the interest in 412(e)(3) plans are, the market risk associated with the stock market compared to an annuity contract with guaranteed minimum interest rates, and retirement is rapidly approaching for all the “baby boomers.”

Requirements: A 412(e)(3) defined benefit plan is authorized by the IRS Code Section 412(e)(3), previously authorized by Section 412(i). The tax code requires plan funding solely by qualified insurance products. Plans can be funded using life and annuity products, or annuity only. The contracts must provide for annual, level premiums. Funding begins when a participant enters the plan and ends at the participant’s retirement date. Plan benefits are provided by insurance contracts.

Advantages of 412(e)(3) Defined Benefit Plans:

  • Guaranteed benefits (provided that annual, level premiums have been paid).
  • Tax deductions.
  •  Larger contributions for older employees
  • Availability of life insurance with tax-deductible premium.


  • Requires annual funding.
  • Plan sponsor must have cash flow to fund at the beginning of each plan year.
  • Participant loans are not permitted.

What. Why. How. Who: 

Q. Whatis a 412(e)(3) defined benefit plan? A. It is a defined benefit pension plan whose annual contribution is calculated under the rules of Internal Revenue Code (IRC) Section 412(e)(3). It is also referred to as a “Fully Insured Plan,” or an “Insurance Contract Plan.” The plan is funded exclusively with insurance products.

Q. Why would a business owner adopt a 412(e)(3) defined benefit plan? A. Adopting a 412(e)(3) plan can be an important financial tool for retirement planning. It provides an opportunity to achieve retirement goals without stock market risk to the principal.Q. How do I evaluate a 412(e)(3)defined benefit plan for my business? A. DaVinci Insurance Advisors is a a qualified advisor for these plans, and will collect census data and other pertinent information. A retirement plan proposal will be prepared based upon your objectives and funding goals.

Q. How do If und a 412(e)(3) defined benefit plan? A. The plan is funded exclusively with annuity and life insurance, or annuity only. The benefits are guaranteed by the contracts provided the annual premiums have been paid.

Q. Who can adopt a 412(e)(3)plan? A. All business entities are eligible for a 412(e)(3) defined benefit plan. This includes sole proprietors, partnerships, C corporations, S corporations, and limited liability companies. The business entity must have stable income, as fluctuating income can create potential funding problems.

Q. Do 412(e)(3) plans have a vesting schedule? A. Yes. One of the advantages of a qualified retirement plan is the vesting schedule. Most plans use a vesting schedule that requires employees to work for an employer a specified period, such as six years, before they are 100% vested. If a participant’s employment is terminated before they are vested, the non-vested portion of their account is forfeited and remains in the plan.

By-The-Numbers | Make The Comparison:
Maximum contribution for an Owner. Compensation $305,000, age 55. Retirement age goal 62. Can defer $20,500 + $6500 (into 401(k)) + $61,000 (into the Profit Sharing Plan). PLUS: Corporate contribution of $302,748 (into 412(e)(3) Annuity only). Or, $418,614 (into 412(e)(3) Annuity & Life Insurance). (Contributions for illustrations only. Group census required for specifics. Values as of 1-1-22).