3713. What requirements must a fully insured plan (a “412(i) plan”) meet to be exempt from the minimum funding requirements?Nuco Employeercline202010-08-27T14:35:00Z2014-08-06T13:33:00Z2014-08-06T13:33:00Z38064597Summit Business Media3810539314Site Map/Retirement Plans/Pension And Profit Sharing/Plan Types and Features/412(i) PlansSite Map/Retirement Plans/Quick Clicks/Fully Insured Plan (previously 412(i)) 412(i) fully insured plan level funding2005-01-25T00:00:00ZTaxFactsDefaultArticle0413-50-tf1.xmlA Discussion about Ethics and 412 Programs.pdf0413-50-tf1.xml116510413-00-tf1.xml415.00;#2234;#2282;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FA Discussion about Ethics and 412 Programs.pdfTax Facts 1What requirements must a fully insured, or 412(i) plan, meet in order to be exempt from the minimum funding requirements?119600.000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-15T00:47:17Z3713. What requirements must a fully insured plan (a “412(i) plan”) meet to be exempt from the minimum funding requirements?A fully insured plan, known as a “Section 412(i) plan” and governed by IRC Section 412(e)(3), is a defined benefit plan that is funded entirely by a combination of life insurance and annuity contracts. This plan can avoid the funding requirements and certain reporting requirements of other defined benefit plans or plans when certain requirements are met initially and annually:(1)The plan must be funded exclusively with individual insurance or annuity contracts (or a combination of both);(2)The contracts must provide for payment of level annual or more frequent premiums over a period ending no later than the normal retirement age of each participant, or the date when the participant ceases participation in the plan, if earlier, and beginning on the date (or the first payment date occurring thereafter) when the individual became a participant, or the time an increase in benefits became effective;(3)The benefits provided each individual under the terms of the plan must equal the benefits provided under each contract at normal retirement age and must be guaranteed by an insurance carrier to the extent premiums have been paid;(4)All premiums must have been paid before the policy due date. In the case of a lapse of policy for late payment, the reinstatement of the policy must occur during the plan year of the lapse and before benefits commence to any participant whose benefits are impacted by the lapse; (5)No rights under the contract may have been subject to a security interest at any time during the plan year; and(6)There are no policy loans on the insurance (including loans to individual participants) at any time.IRC Sec. 412(e)(3).A plan funded exclusively with group contracts, which has the same characteristics as described above, also will be exempt.IRC Sec. 412(e)(3); Treas. Reg. §1.412(i)-1(c). A plan may be funded by a combination of individual contracts and a group contract, if the combination, in the aggregate, satisfies the requirements.Treas. Reg. §1.412(i)-1(d).Regulations finalized in 2005 require that life insurance contracts distributed from any qualified plan be valued at their fair market value (Q 471).2005-2 C.B. 591, T.D. 9223. Abuse in this area has been subject to a rigorous audit program by the IRS.As any other qualified plan, a fully insured plan is subject to IRC requirements prohibiting discrimination against nonhighly compensated employees. This requirement applies to contributions and benefits (Q 3742), as well as the availability of any other benefits, rights and features (Q 3754). Plans providing uniform benefits and meeting the safe harbor requirements will satisfy the “nondiscriminatory in amount” requirement of IRC Section 401(a)(4) (Q 3742).Treas. Reg. §1.401(a)(4)-3(b)(5). The IRS has stated that a plan that provides highly compensated employees the right to purchase life insurance contracts from the plan at cash surrender value, but does not provide that right (or rights of equal value) to nonhighly compensated employees, violates the nondiscrimination requirement.See Rev. Rul. 2004-21, 2004-10 IRB 544.The IRS also has ruled that differences in cash value growth terms or different exchange features among life insurance contracts can create an optional form of benefit, or distinctly different rights and features (Q 3754), even if the terms under which the contracts can be purchased from the plan are the same. The IRS noted that one benefit right or feature is of inherently equal or greater value than another benefit, right, or feature (i.e., it is nondiscriminatory) only if, at any time and under any conditions, it is impossible for any employee to receive a smaller amount or a less valuable right under the first benefit, right, or feature than under the second benefit, right, or feature. If this “inherently equal to or greater than” standard is not met, when comparing the benefits, rights and features available to nonhighly versus highly compensated employees, the plan is discriminatory.Rev. Rul. 2004-21, 2004-10 IRB 544.Miscellaneous RulesPremium payments will be considered level even though experience gains and dividends are applied against premiums.Treas. Reg. §1.412(i)-1(b)(2)(ii). The requirement that a plan be funded exclusively by insurance contracts does not prevent an employer from making payments to satisfy minimum vesting requirements with respect to accrued benefits derived from employee contributions. For example, an employer may pay the “load factor” on insurance contracts to meet requirements that an employee be 100 percent vested in the accrued benefit derived from his or her own contributions.Treas. Regs. §§1.412(i)-1(b)(2)(i), 1.412(i)-1(c)(2)(i). Furthermore, if certain conditions are met, a side fund may be used to fund the additional benefits required when a plan is top-heavy (Q 3795, Q 3800).See Treas. Reg. §1.416-1, M-17.