The defined benefit pension plan is the classic solution prescribed for older business owners and professionals with tax problems, who generate consistently high income.

It allows larger initial deposits (and tax deductions), and accumulates interest on those funds tax-deferred until retirement. There is a large population of aging baby boomers who need to save big bucks in a short time. The 412(i) plan, because of its simple administration and high initial tax deduction is one of the most efficient retirement plans.

A small older business owner can not ask for anything better for a pension plan.

In real language, it is a ‘fully insured’ plan, which is funded exclusively by insurance and annuity contracts. Insurance has been considered by some a less-than-effective funding vehicle, so what makes this version of defined benefit plan more attractive?

1. First, 412(i) plans play it safe, they involve no investment risk and they guarantee all benefits.

2. Second, because all values are guaranteed by contract, section 412(i) of the irc (internal revenue code, hence the plan’s name), exempts such plans from the funding and filing requirements that complicate un-insured and split-funded defined benefit plans.

3. Finally, and here is the real plus, the fully insured plan’s conservative funding and investment assumptions tend to generate larger initial contributions and  deductions than regular defined benefit plans.

For example, the first-year contribution (to fund the maximum allowable benefit) for a 60-year-old in a 412(i) plan can be 17% larger than that provided under a standard defined benefit plan. And the advantage is greater for participants with more years to accumulate deposits. A 50 year old gets a 26% advantage.

A 412(i) plan is not for everyone. But the same people who would gain the most from a standard defined benefit plan would also find a 412(i) plan attractive. A small business owner who regularly generates plenty of taxable cash in his enterprises, should be the
most suitable person to adopt 412(i). The criteria should be :

A. Is a small business owner with one to five employees

B. Is generally over age 45/50.

C. Has a profitable business with a stable earnings history.

D. Wants to maximize contributions and deductions, avoiding IRS entanglements.


As with all qualified plans, there is need for competent plan design, careful installation (to avoid those irs audits) and annual reviews (to keep the plan provision and coverage in compliance). In extreme circumstances, an employer earning $14,000 a year can contribute almost $164,000 annually into the plan, all tax deductible.

So, despite what we hear to the contrary, defined benefit plans are alive and well, and should be of immense value (as group employee benefit) in the senior market, where long term care, estate planning, post retirement medical and other benefits are so much preached.