A Comprehensive Guide to Tax-Saving 412(e)(3) Defined Benefit Plans for Business Owners

For business owners who are looking to maximize their retirement savings while benefiting from significant tax advantages, a 412(e)(3) defined benefit plan may be a solution. This comprehensive guide explores the intricacies of 412(e)(3) defined benefit plans, shedding light on their features, benefits, and considerations. Understanding the workings of these plans, business owners can make the informed decisions necessary to build a secure and financially stable future.

Understanding 412(e)(3) Defined Benefit Plans

A 412(e)(3) defined benefit plan is a special type of retirement savings vehicle. These plans are specifically designed for business owners who are high-income earners. They derive their name from section 412(e)(3) of the Internal Revenue Code, which governs these plans and how they are set up, funded and maintained. Unlike most retirement plans, a 412(e)(3) plan offers business owners a predetermined benefit at retirement, which is calculated based on factors such as age, income, and years of service.

  • A 412(e)(3) defined benefit plan offers significant tax deferral potential through fully tax-deductible employer contributions and tax-deferred growth of plan assets.
  • High Contributions make 412(e)(3) plans attractive for business owners looking to accumulate retirement savings at an accelerated pace, particularly for those over 40 years of age.
  • It’s important to consider actuarial calculations, funding requirements and some lack of flexibility when it comes to employer contributions, which are required in a 412(e)(3) plan.

Features and Benefits of 412(e)(3) Defined Benefit Plans

Tax Advantages

One of the major advantages of a 412(e)(3) defined benefit plan is their significant tax savings potential. Contributions are made by an employer and are fully tax deductible, which reduces current taxable income. Furthermore, the plan’s assets grow tax-deferred, meaning there are no taxes until funds are distributed from the plan in retirement.

High Contributions

412(e)(3) plans allow for high contributions, enabling business owners to accumulate retirement savings at an accelerated pace. Employer contribution requirements are determined by an actuarial calculation, which considers the employee’s age, expected retirement age, compensation, and other factors which combined make these plans especially attractive for business owners older than 40 years of age.

Predetermined Retirement Income

A key feature of 412(e)(3) defined benefit plans is that they can guarantee a specific retirement income. This supplies participants with a predictable income stream throughout their retirement years, which provides peace of mind and financial stability.

Asset Protection

Assets held within a 412(e)(3) plan are protected from creditors’ claims, which provides an additional layer of asset protection for business owners.

Considerations and Limitations

Actuarial Calculations

The contribution amounts for a 412(e)(3) plan are determined by actuarial calculations and the plan usually requires third-party administration. Therefore, it is crucial to work with qualified professionals to make sure a 412(e)(3) plan is in compliance with IRS regulations.

Funding Requirement

412(e)(3) plans require regular funding so guaranteed retirement benefits can be generated. A business must be able to commit to making these required contributions consistently to maintain a plan’s integrity.


Unlike defined contribution plans such as 401(k)s and IRAs , 412(e)(3) plans offer limited flexibility when it comes to contributions. Yet, the guaranteed life-time income 412(e)(3) plans provide, can help overcome the downside of the more flexible defined contribution-based retirement plans, which do not provide an income guarantee.


A 412(e)(3) defined benefit plan presents business owners who are high-income earners, with a powerful retirement savings tool. They can offer significant tax advantages, allow for large contributions, and provide a guaranteed life-time retirement income.

Consulting with professionals, such as actuaries, third party administrators, certified accountants and insurance representatives, can help to ensure the plan you setup is structured effectively and in compliance with applicable regulations. In funding a 412(e)(3) defined benefits plan, business owners can build a robust retirement nest egg and help secure the stability of their financial future.

At McFie Insurance, we can help to provide and connect you with the professional help, resources and guidance you will need to initiate, fund and sustain your own 412(e)(3) plan. Call 702-660-7000 today to discover if you qualify for the generous tax savings and guaranteed life-time income a 412(e)(3) plan provides.

Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Family Insurancewhich helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here. 

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