412(e)(3) The Retirement Solution

THE RETIREMENT ISSUE With more people facing retirement than ever before many are concerned they are not saving enough for retirement and they have a fear they won’t be able to stretch their savings out over their lifetime. There are additional obstacles those thinking about retirement are also facing – the rising cost to health care, inflation eroding purchasing power, and the unpredictability of Social Security. Not having an employer sponsored pension plan makes funding retirement even more concerning. Sound Familiar?

BENEFITS OF A 412(e)(3) Leverage business dollars to fund tax deductible personal benefits Provide a competitive benefit to help attract and retain highly qualified employees Employer’s contributions that are not included in income by the participant Retirement Income The opportunity to purchase life insurance with tax deductible dollars The implementation of a qualified plan can help you financially prepare for retirement. A qualified plan allows you to leverage business dollars to help fund your retirement, as well as your employees. Did I mention contributions are tax deductible? That’s right, qualified plan contributions are generally tax deductible! Save Money today - for tomorrow!

412(e)(3) DEFINED BENEFIT PLAN Funded solely with insurance company contracts Contribution and benefit based on contract guarantees* What is a 412(e)(3) plan? A 412(e)(3) plan is a defined benefit plan that meets the requirements of IRC Section 412(e)(3). Section 412(e)(3) requires that the plan use Insurance Company contracts, including fixed annuities and level premium life insurance contracts, and that the benefits are based on the contract guarantees. Because the plan must be funded using contract guarantees which are typically lower than what an actuary might assume, this type of plan generates the largest contribution/ tax deduction of any plan type. *Guarantees are dependent upon the claims-paying ability of the issuing company.

DETERMINING TAX DEDUCTION / CONTRIBUTION Entry Age Retirement Age Life Insurance Plan Duration Average Compensation Annuity Employee Demographics How large of a contribution / tax deduction you ask? Well, that depends on several factors: Entry age – older employees receive larger contributions Retirement age – employees who have more years to fund receive a smaller contribution Duration – employees who have more years to fund receive a smaller contribution Average compensation – higher earning employees receive larger contributions Products – did you know you can have life insurance in your plan? The plan is funded solely by fixed annuities or fixed annuities and whole life insurance. Adding life insurance increases the total contribution

LIFE INSURANCE IN A 412(e)(3) Purchased on a pre tax basis Guaranteed cash value at retirement Increases tax deduction for the business There is value in including life insurance within your 412(e)(3): - Premiums are paid with pre-tax dollars, increasing your buying power Cash values can be accessed at retirement using policy loans. If loans are taken from a whole life policy, they will reduce the policy's death benefit, and the amount of cash value available for future loans. You will also need to work with your agent to ensure that excessive loans don't cause the policy to lapse, which would result in a taxable event. - Including life insurance increases the plan contribution and therefore the tax deduction - Life Insurance provides a death benefit in the event of premature death, fully completing the plan - Buying life insurance inside a qualified plan can be a cost effective way to provide a valuable employee benefit May complete your retirement plan Fringe benefit for employees

LIFE INSURANCE OPTIONS WHEN THE PARTICIPANT LEAVES THE PLAN: Surrender the Policy  Take a Taxable Distribution  Buy the Policy  Exchange the Policy – Qualified Plan Exchange Privilege (QPEP)*  When you or an employee leave the plan, there are various options available for removing the life insurance policy from the qualified plan. You can: Surrender the life insurance policy, which will result in the loss of the death benefit Take a taxable distribution Buy the policy Exchange the policy leveraging the Qualified Plan Exchange Privilege – unique to NLG! *Unique to National Life Group

QUALIFIED PLAN EXCHANGE PRIVILEGE RIDER (QPEP) HOW IT WORKS Participant surrenders policy for its cash surrender value and retains the proceeds under the plan or rollover to an IRA. New policy issued outside of plan for Net Amount at Risk (Face Amount – CV) without any medical evidence, regardless of health, at current attained age. The newly issued policy can be any type of permanent insurance offered by the insurance companies of National Life Group, it does not need to be the same type of insurance as the policy issued in the qualified plan. The QPEP rider is unique to NLG and is a “no cost” rider added at issue on all policies issued inside a qualified plan. If the rider is exercised, the existing policy must be surrendered while still in the qualified plan. The cash surrender value is placed in the plan’s side fund account. In this manner, the entire vested account can be rolled to an IRA without incurring any taxes until such time as distributions are made from the IRA. The face amount of the new policy that is issued outside the plan cannot be more than the net amount at risk (face amount – cash value) of the policy in the plan, as of the date of exchange. The new Policy will be issued as a personally owned policy outside of the pension plan on the basis of the participant’s age on the date of exchange. No evidence of insurability will be required. QPEP rider (form series 8518) is issued by National Life Insurance Company. QPEP rider (form series 8336) is issued by Life Insurance Company of the Southwest.

REDUCING OR ELIMINATING CONTRIBUTIONS There are three options available if there is a need to reduce contributions long term: Reduce formula  Convert from Fully Insured 412(e)(3) to traditional defined benefit  At this point the idea of retirement benefits and business deductions must have you jumping for joy, increasing your desire to adopt a Defined Benefit plan. However, the one question that you’re probably asking yourself, is “What happens if, at some point in the future, I cannot continue to make large contributions to the plan?” While you are ideally maintaining the contribution level specified in your plan document, things can and do happen - a turn in the economy, a need to divert corporate assets to build the business, health issues, etc. You should know that these plans are structured for a level contribution amount – but in the event that “something happens” there is a way out and the plan is not completely inflexible. If there is a need to reduce contribution levels down the road, the first determination should be whether the cash flow problem is temporary or long term. If the duration is expected to be short term, let’s say a bad year perhaps, you may be better off borrowing the contribution needed from outside sources without changing the plan. However, if the need to reduce contributions is long term, there are at least 3 options: 1) reduce the benefit formula - this does not take away anything already accrued in your plan, but what it does is it brings the cost down to a level that is affordable. One word of caution here, the benefit formula should not be adjusted annually to suit that years specific tax deduction. Operating the plan in this manner could eventually place all of your plan deductions in jeopardy; 2) amend from a high contribution Fully Insured DB to a lower contribution Traditional Defined Benefit plan - since higher contributions were contributed in the early years, a traditional DB plan may generate a much lower cost; 3) worst case scenario, the plan can be completely terminated. Note that surrender charges or fees could be incurred upon plan termination. Terminate plan 

THE 412(e)(3) PLAN SOLUTION BUSINESS AND PARTICIPANTS Tax Deductible Contribution Reward Yourself and Key Employees Provide Rank and File meaningful benefit PERMANENT LIFE INSURANCE Acquired with pre tax funds Completes the retirement plan in the event of premature death Provides family with financial protection EXECUTIVE Retirement benefits Tax deferred growth Income Tax Free Death Benefit Now that you have a better understanding of what a 412e3 plan is, you have important considerations to make. A 412(e)(3) defined benefit plan can help you to attract and retain quality employees. Sharing in a company’s profit through a 412e3 is a tangible motivator for employees and can help increase overall corporate profitability. Employees are inclined to stay with your firm to meet service requirements to become fully vested in their benefits. You as a business owner can also help secure your own retirement through benefits that are not dependent on the sale of your business. Looking at the bottom line – business dollars are leveraged to fund benefits on a tax favored basis, and that makes both dollars and sense!