These folks are typically Personal Service Corporations. Typical clients include:
Any employer can adopt the 412(e)(3) Plan, including: Sole proprietors, C Corporations, S Corporations, Partnerships, Limited Liability Companies, and Family Limited Partnerships. It is best suited for the owner of a small business or professional enterprise looking to maximize current tax deductions and secure a large amount of retirement funds. The 412(e)(3) Plan is an excellent option for single employee businesses, maximizing tax-deductible contributions and minimizing W2 income.
The 412(e)(3) Plan is a defined benefit retirement pension plan guaranteed with insurance company life and annuity contracts. Introduced in 1974, it is also referred to as a “Fully Insured Defined Benefit Plan”. Unlike traditional defined benefit plans, the 412(e)(3) Plan takes the risk out of retirement investing. Funds are guaranteed by insurance company contracts, avoiding the ups and downs of the stock market. The Plan can never suffer any losses or be under-funded.
A 412(e)(3) plan offers the largest tax-deductible contributions of any qualified retirement plan—up to 3x more than a traditional defined benefit plan and 6x more than a defined contribution plan. It allows employers to "fast fund" retirement for older employees without significantly increasing costs for younger ones.
Plans are fully funded each year with fixed contributions but can be designed to match your desired funding level. Benefits grow tax-deferred, are protected from creditors, and provide flexible exit options, including rollovers, lump sums, or guaranteed lifetime income.
Employers can maintain an existing 401(k) alongside a 412(e)(3) plan. With proper planning, death benefits may also be estate tax-free, and permanent life insurance coverage can continue into retirement.
The above represents CJA’s opinion regarding the 412(e)(3) Plan and is not intended as legal or tax advice regarding the treatment of any particular employer’s contributions to its plan or the treatment of benefits provided to the employees of any particular employer. A taxpayer should consult its independent tax or legal advisor before adopting its own 412(e)(3) Plan.
Qualified retirement plans meet IRS requirements and offer significant tax advantages, including tax-deductible contributions, tax-deferred growth, and creditor protection—making them one of the most efficient ways to save for retirement.
Under Section 199A of the Tax Cuts and Jobs Act of 2017, certain pass-through entities may qualify for a 20% deduction on qualified business income. Eligible entities include:
However, specified service businesses (e.g., CPAs, attorneys, doctors, consultants, brokers, performing artists, and athletes) begin to lose this deduction once taxable income exceeds certain thresholds. In 2024, phase-outs begin at $191,950 (single) and $383,900 (married filing jointly).
A substantial contribution to a qualified retirement plan can reduce taxable income below these thresholds—helping high-earning service businesses regain the 20% deduction while also benefiting from the retirement plan deduction.
Thanks to the SECURE Act, you now have more time to establish a defined benefit plan. For calendar-year businesses, the deadline is the date you file your tax return—including extensions.
Key Deadlines:
Example for S Corporation:
All contributions must be reflected on your tax return to qualify for a deduction. Monthly or quarterly contributions are allowed, but the plan must be established and funded before filing.
Client was a 63-year old ranch owner, who knew he needed money for retirement and to pass his ranch on to his children.
A 412(e)(3) Plan offers the largest contributions of any qualified retirement plan. Learn more here about this type of Defined Benefit Plan.
Still have questions about the 412(e)(3) Plan? Here are the most frequently asked questions about this type of retirement plan - click here.