As noted, as of January 1, 2008, §412(i) has been replaced by §412(e)(3), although it is likely that fully-insured defined benefit pension plans will continue to be referred to by the former subsection for some time to come.Section 412 of the Internal revenue Code generally establishes minimum funding standards for qualified retirement plans, and paragraph (3) of subsection (e) provides an exception to these standards by defining and authorizing the establishment of a “fully insured” defined benefit pension plan.
Plans qualified under §412(e)(3) are exempt from minimum funding standards, and therefore are exempt from certain requirements regarding reporting and actuarial certification that apply to other qualified plans. In order to qualify, plans must (1) be funded exclusively with individual insurance contracts, i.e., annuities alone or in combination with life insurance contracts; (2) use contracts that provide for level annual premium payments extending no later than the participants’ specified retirement ages; (3) have plan benefits equal to the benefits in the insurance contracts, and guaranteed in the contracts; (4) have all premiums paid for all plan years; (5) have no rights subject to a security interest (e.g., collateralize a loan) at any time; and (6) have no loans against any insurance policy cash values.
The designation of these plans as “fully insured” means that all products used to fund the plans must be insurance products, i.e., annuities or a combination of life insurance and annuities. It does not mean that plans may be funded with life insurance policies alone. Such funding would violate the “incidental rules” governing life insurance in pension plans, and would disqualify the plans.
