1. 412(e)(3) The Retirement Solution

2. 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?

3. WHICH PLAN IS APPROPRIATE?
Profit Sharing
Defined Benefit
Which plan best meets the needs of the aging business owner?
The types of qualified plans range from SEPs, SIMPLEs and profit sharing plans to Defined Benefit plans. The younger the business owner, the longer they have to save, so the profit sharing type plans should work well. However, somewhere around age 45 the contribution limits of a profit sharing plan are no longer going to allow the retirement savings that can be achieved in a Defined Benefit plan and this is the age group we are concentrating on today.
Age 45

4. DEFINED BENEFIT PLAN TYPES
ACTUARIALLY FUNDED DEFINED BENEFIT PLANS
412(e)(3) FULLY INSURED DEFINED BENEFIT PLANS
The only qualified plans that allow older employees to accumulate significant assets in a short period remaining until retirement are defined benefit plans. There are actuarially funded defined benefit plans that require the services of a pension actuary each year to calculate the on-going contributions. These include cash balance plans. Then there are 412(e)(3) fully insured plans that must be funded with life insurance company products that have guarantees. The plan is funding at the product guarantees each year so this plan does not require an annual review by a pension actuary.

5. DEFINED BENEFIT PLAN LIMITS
Maximum Annual Benefit (2016) Is lesser of:
100% High three consecutive year average compensation; OR $210,000
No Specific Contribution Limit
The maximum benefit at retirement is $210,000 (2016), but the cost to provide that benefit is not limited. The benefit limit of $210,000 annually in retirement may be reduced for retirement ages prior to age 62 or for those with less than 10 years to retirement. The benefit limit may also increase for those retiring after age 65.
The annual benefit at retirement is calculated on a high three consecutive year average salary. The maximum salary which can be used for plan purposes is $265,000.
There is no specific limit on the amount of contribution.
Just how high the contribution to a Defined Benefit plan can be depends on many factors including:
Entry Age
Retirement Age
Years of Service
Average Compensation
Actuarial Assumptions
Asset Performance
Maximum Compensation $265,000 (2016)

6. ERISA PLAN ELIGIBILITY
Age 21
1 Year of Service
Works 1,000 Hours Annually
The standard eligibility for ERISA plans is age 21, 1 year of service and works 1,000 hours annually. If there are employees, the employer will generally elect a vesting schedule. Maximum Vesting schedule for top-heavy plans is 6 year graded vesting
EMPLOYER ELECTS VESTING SCHEDULE

7. DETERMINING TAX DEDUCTION
RETIREMENT AGE
ENTRY AGE
DURATION
AVERAGE COMPENSATION
PRODUCTS USED
The size of the tax deduction is determined based on several factors:
Entry age
Retirement age
Duration
Average compensation
And the product used

8. WHO CAN HAVE A QUALIFIED PLAN?
Any successful business can be a prospect for a Qualified Plan, including
C-Corporations
S Corporations
Limited Liability Corporations
Limited Liability Partnerships
Professional Corporations
Partnerships
Sole-Proprietorships
Non-Governmental Non-Profit Organizations
For 412(e)(3) defined benefit plans, generally you will be looking for prospects with 1 to 5 employees. With the business owner either having earned income or W-2 Income and a stable profit history.

9. 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 your business owner clients be prepared for retirement. A qualified plan allows the participant to leverage business dollars to help fund their retirement, as well as their employees’ retirement. Did I mention contributions are tax deductible? That’s right, qualified plan contributions are generally tax deductible! Saving Money today - for tomorrow!

10. 412(e)(3) DEFINED BENEFIT PLAN
Funded solely with insurance company contracts
Contribution and benefit based on contract guarantees*
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.

11. APPROPRIATE 412(e)(3) PROSPECTS
Small Company – few employees 1
High, stable profits 2
Looking for high tax deductions 3
Older owner, younger employees 4
Make ongoing contributions 5
Because of the high contributions generated by this type of plan, the employer is usually a very small business with less than 5 employees. The owner is within years to retirement and is, on average, 10 years or more older than the employees.
The business has a history of stable, high profits, and wants an ongoing tax deduction substantially higher than the 25% of payroll limit available with a Defined Contribution plan. The business has the ability to pay the annual contributions as they come due, and is willing to make a 5 year commitment to keeping the plan in place. The ideal prospect will be tax driven - meaning they are looking for ongoing high tax deductions.
Some good 412(e)(3) plan candidates might be:
Individuals who have taken an early retirement package from a company where they were an employee but have now started their own business. These individuals have no need for the current income from the 2nd career and want to shelter as much as possible. Remember, it is not necessary to have a 6 figure income, since many of these candidates may only want to contribute $25- $50,000 a year but can’t accomplish that in any other plan type. Members of Boards of Directors and small family run businesses also make good candidates.
Minimum of five years to fund the commitment 6

12. INAPPROPRIATE 412(e)(3) PROSPECTS
Large company – many employees 1
Fluctuating profit history 2
Looking for one-time tax deduction 3
Owner younger than employees 4
Reluctant to make ongoing contributions 5
A 412(e)(3) prospect is NOT usually a large company with older employees, or a company with a fluctuating profit history. As we discussed before, the owner is typically not under age 40. It is NOT an employer looking for a one time tax deduction, or an employer worried about paying ongoing contributions. It is also NOT an employer reluctant to commit to the plan for at least minimum 5 years.

13. BENEFITS OF 412(e)(3) PLAN Easy to explain No enrolled actuary needed
The 412 (e)(3) Plan is easy to explain: it’s a retirement benefit that is fully guaranteed; and the accrued benefit is equal to cash surrender value
No enrolled actuary is needed: which means lower administrative fees than traditional defined benefit plans.
High deductions: potentially higher deductions than a defined contribution plan
Higher deductions

14. Actuarial Funded VS 412(e)(3) Defined Benefit
TRADITIONAL
412(E)(3)
Deductible Contribution
High
Higher
Benefit Guarantees*
Yes
Administrative Expense
Lower
Contribution Level
Increases
Decreases
Funding Options No
Enrolled Actuary
Quarterly Contributions
Over Funded/Under Funded
Comparing the Traditional Defined Benefit Plan to 412(e)(3), both plans are defining a monthly benefit in retirement. But because the 412(e)(3) plan is funding the plan at the guarantees of the insurance products, the contributions are higher than in a Traditional Defined Benefit Plan. This is also the reason the annual administrative fees are lower in a 412(e)(3) plan. It does not require a pension actuary to review investment performance because the plan is funding at the guarantees of the life insurance products. Excess earnings on those products must go back into the plan and reduce the employer’s contribution in the next year. For this reason, the owner isn’t as likely to see wide fluctuations in contribution levels from year to year. With a Traditional Defined Benefit Plan, the investments are chosen at the discretion of the business owner. The more aggressive the investments, the more likely there will be wide fluctuation in contributions from year to year. Because the Traditional Defined Benefit Plan allows the business owner to select the investments, there is the possibility that the plan could become over or under funded. This would not happen with a 412(e)(3) plan.
*Guarantees are dependent on the claims-paying ability of the issuing company.

15. 412(e)(3) FULLY INSURED DEFINED BENEFIT PLANS
AGE
SALARY
AVERAGE
ANNUAL CONTRIBUTION W/OUT LIFE INSURANCE 1
ANNUAL CONTRIBUTION WITH LIFE INSURANCE 2
MAXIMUM MONTHLY BENEFIT 3
INSURANCE DEATH BENEFIT 5
LUMP SUM AT RETIREMENT 4
Dentist A 55
$260,000
$205,933
$253,859
$11,064
4,806,477
$2,431,648
Dentist B 50
260,000
126,935
153,308
11,064
3,873,791
2,431,648
Hygienist 37
60,000
15,712
18,143
3,161
888,629
694,725 33
55,000
11,777
13,373
2,898
801,700
636,923
Off Mgr 49
40,000
22,309
26,864
2,107
714,618
463,077
Total
$382,666
$465,547
Keys
$332,868
$407,167
% to Keys
87%
Contributions in a 412(e)(3) plan, once established, must be paid each year. Those contributions must be placed in fixed annuities or a combination of fixed annuities and level premium life insurance contracts. The assumptions in a 412(e)(3) plan are based on the guarantees built into the contracts used to fund the plan.
In this example you can see the contribution amount without life insurance in the plan and the contribution with maximum life insurance, using National Life’s NL Life Builder life insurance contracts.
For the business owners, the contribution with life insurance is $74,299 more than the plan without life insurance.
Owner A – by adding life insurance to the plan he would have a death benefit in excess of $4.8 million. If owner A died without life insurance in the plan, his beneficiary would receive the present value of the accrued benefit in his account. With life insurance, the beneficiary still get the present value of the accrued benefit in the side fund, but also gets the death benefit from the life insurance. It completes the plan.

16. 412(e)(3) FULLY INSURED DEFINED BENEFIT PLANS
AGE
MONTHLY BENEFIT WITH OR WITHOUT INSURANCE 3
LUMP SUM VALUE AT RETIREMENT WITH OR WITHOUT INSURANCE 4
INSURANCE DEATH BENEFIT 5
Dentist A 55
$11,064
$2,431,648
4,806,594
Dentist B 50
11,064
2,431,648
3,873,791
Hygienist 37
3,161
694,725
888,629 33
2,898
636,923
801,700
Off Mgr 49
2,107
463,077
714,618
Even though the total contribution will increase with the addition of life insurance, the monthly benefit in retirement and the lump sum value in retirement remain unchanged. But with the addition of life insurance, each participant will have a death benefit. Let’s look at Owner A. By adding life insurance to the plan, he would have a death benefit in excess of $4.8 million. If Owner A died without life insurance in the plan, his beneficiary would receive the present value of the accrued benefit in his account. With life insurance, the beneficiary still gets the present value of the accrued benefit in the side fund account, but also gets the death benefit from the life insurance.

17. After Tax Analysis Plan Sponsor’s Federal Tax Bracket 33%
Employer Contribution
$465,547
Current Tax Savings*
($153,631)
Net After-Tax Outlay
$311,916
Contribution for Owners
$407,167
Net Excess For Owners
$95,251+
In the 412(e)(3) Plan with insurance, the total plan contribution is $465,547. The employer, who is in a 33% tax bracket, would have a tax savings of $153,631 by contributing to the plan. The net after tax cost of the plan would be $311,916. The total contribution for the owners is $407,167. The cost for the employees is $58,380. So the tax savings from contributing to the plan exceeds the contribution to the employees. The owners have a net excess deferral of $95,251.
The after tax analysis is a great way to show the owner what he/she can save in taxes versus what they are going to have to contribute to employees. If the net excess deferral is a positive, they have saved more in taxes then they have contributed to their employees in the plan.
Hypothetical example. For illustrative purposes only.
*Assumes above-referenced tax bracket and company would otherwise retain income. Your results likely will differ.

18. COMBINING DB WITH 401(k) EXAMPLE: #1
AGES
SALARY
ANNUAL CONTRIBUTION W/LIFE INSURANCE 2
SAFE HARBOR 401(K) W/3% NON-ELECTIVE
TOTAL CONTRIBUTION
Dentist A 55
$265,000
$253,859
$31,950
$285,809
Dentist B 50
265,000
153,308
31,950
185,258
Hygienist 37
60,000
18,143
3,600
21,743 33
55,000
13,373
3,300
16,673
Off Mgr 49
40,000
26,864
2,400
29,264
Total
$465,547
$73,200
$538,747
Keys
$407,167
$63,900
$471,067
% to Keys
87%
If the owner wanted to contribute more, they could have a 401(k) deferral plan. Any employer can establish a deferral only 401(k) plan for themselves and their employees.
In Scenario # 1, the owners are each making a $24, (k) deferral, consisting of a maximum regular deferral of $18,000 and a $6,000 catch up contribution available to participants over age 50. The employees have elected to defer 3% of salary. Note that the $24,000 contributed annually over a 10 year period, assuming 7% each year compounded annually would increase the retirement account of each owner by over $354,806.
The 401(k) is a safe harbor plan, so the owners must give employees either a matching contribution or a 3% non-elective contribution. We have shown the 3% non-elective contribution option. This goes to everyone who is eligible, even if they do not defer.
Benefit Formula: % for compensation for each year of participation. Less than 25 years.
NL Life Builder life insurance , standard non-smoker, unisex rates., max 2/3rd rule and Flexible Premium Annuity. This example is purely hypothetical and for illustrative purposes only.

19. COMBINING DB WITH 401(k) EXAMPLE: # 2
AGES
SALARY
ANNUAL CONTRIBUTION W/LIFE INSURANCE 2
SAFE HARBOR 401(K) W/3% NON-ELECTIVE
3% INTEGRATED PROFIT SHARING
TOTAL
Dentist A 55
$265,000
$253,859
$31,950
$7,950
$293,759
Dentist B 50
265,000
153,308
31,950
7,950
193,208
Hygienist 37
60,000
18,143
3,600
1,800
23,543 33
55,000
13,373
3,300
1,650
18,323
Off Mgr 49
40,000
26,864
2,400
1,200
30,464
Total
$465,547
$73,200
$20,550
$559,297
Keys
$407,167
$63,900
$15,900
$486,967
% to Keys
87%
77%
The owner can get more. In addition to the defined benefit contribution and the 401(k) deferral, the business owner could make a profit sharing contribution, and deduct everything.
Under the Pension Protection Act of 2006, if the defined benefit plan for the business is not covered under the Pension Benefit Guaranty Corporation (PBGC) then up to 6% of eligible salary can be contributed by the employer to an individual limit of $265,000. The “employer contribution” would be the 3% non-elective in the 401(k) as well as a profit sharing contribution. For this business, that would mean a profit sharing contribution of $20,550.
This business would not be covered under PBGC because it is a professional service organization. If it were a business covered under PBGC, the up to 25% of eligible payroll would be allowed as an employer contribution. In this example, that would mean 3% non-elective under the 401(k) and 22% as a profit sharing contribution.
Benefit Formula: % for compensation for each year of participation. Less than 25 years.
NL Life Builder life insurance , standard non-smoker, unisex rates., max 2/3rd rule and Flexible Premium Annuity. This example is purely hypothetical and for illustrative purposes only.

20. PENSION BENEFIT GUARANTY CORPORATION (PBGC)
$60,136; Maximum insured annual pension benefit for 65 year old*
PBGC created in 1974 
Takes over defined benefit plans in distress terminations 
The Pension Benefit Guaranty Corporation was created in 1974 to protect employee benefits in these types of plans. Employer sponsors of Defined Benefit plans pay a nominal premium to the PBGC each year for this coverage which insures participant benefits of up to a specified amount (indexed for inflation) at retirement age 65. In the event of a distress plan termination where the plan assets are not sufficient to cover employee accrued benefits, the PBGC will often take over the administration of the plan until the guaranteed benefits have been paid out.
Funded with premiums paid by plan sponsors 
*For age 65 straight-life annuity

21. PRE-RETIREMENT DEATH BENEFITS “ENHANCED BENEFITS”
PERSONAL NEED FOR LIFE INSURANCE
BUSINESS NEED FOR LIFE INSURANCE
INCOME*
TAX DEDUCTIBLE PREMIUMS
Reasons for having life insurance inside a Qualified Plan include:
Personal need for life insurance – the plan self completes for insurance face value
Business need for life insurance – business succession planning
The potential for income at retirement by accessing the cash value using policy loans or withdrawals.
Tax deductible premiums
Let’s look at each of these in more detail.
Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Surrender charges may
reduce the policy’s cash value in early years.

22. 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 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. The client should work with their 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

23. THE RULES ANY PERMANENT LIFE INSURANCE PRODUCT CAN BE USED
Must be “incidental” to the reason for having the plan 
The IRS allows life insurance to be issued inside of a qualified plan as long as the life insurance is incidental to the reason for having the plan, which is to accumulate money for retirement. Because the life insurance is incidental to the reason for having the plan, only a specified portion of each annual contribution can be used to fund the life insurance premium. These limits are called the incidental limits.
DB Fully Insured 412(e)(3) plans only allow for Whole Life Insurance
IRS defines how much insurance may be provided - “incidental limits.” 

24. DEFINED BENEFIT PLANS INCIDENTAL LIMITS
Revenue Ruling
100 Times Monthly Benefit
There are two ways to calculate the life insurance in a defined benefit plan. One way is known as Revenue Ruling , sometimes called the 2/3rds method.
Up to 2/3rds of theoretical uninsured contribution is used to calculate the insurance premium for whole life.
Up to 1/3rd used to calculate the insurance premium for universal life.
The second is the 100 times monthly benefit method. For example, if the monthly benefit was $10,000 the maximum face amount of insurance would be $1 million.

25. A SMALL PRICE TO PAY… … and it’s Totally Recoverable
Participant is taxed annually on the “Economic Benefit ” 
Economic Benefit = Net Amount at Risk (face – CV) 
Recoverable as “tax free basis” 
When life insurance is provided in a qualified plan there is a current taxable event to the participant (known as the “economic benefit”). The theory of the income taxation of the “economic benefit” is that the participant is currently receiving a benefit (the life insurance protection) under the plan and a current benefit should be taxed as opposed to a future benefit which is deferred.
This taxable income is based on the Table 2001 rates or the alternate term rates of the life insurance company. The term cost or cost of the “pure amount at risk” which is taxable to the participant is the difference between the face amount of insurance and the cash surrender value of the policy at the end of the policy year.
The participant can recover the tax paid once the policy is removed from the plan – if the policy is assigned to the participant at either separation of service or at retirement, the participant is taxed on the cash value of the policy minus the tax that was paid on the economic benefit.
… and it’s Totally Recoverable

26. ! The same product must be offered for all participants PRODUCT
Because life insurance is a valuable benefit in a retirement plan, if it is offered, the IRS protects the participants rights to buy it.
The same product must be offered for all participants on a uniform and nondiscriminatory basis
Limited pay contracts cannot discriminate in favor of owners with fewer years to retirement.
A participant can waive coverage or specify an amount less than the maximum allowed

27. ACCELERATED BENEFIT RIDERS
Benefits can not be exercised while policy is owned by plan 
ABR Terminal & Chronic can be included in any plan 
ABR Critical is only available in Profit Sharing Plans 
Accelerated Benefit Rider cannot be exercised while the policy is owned by the plan.
The ABR Terminal and Chronic can be included in any plan; however, Critical is only available in Profit Sharing Plans.
Accelerated Benefit Riders are optional and may not be available in all states or on all products. Receipt of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy, may result in a taxable event, and may affect your client’s eligibility for public assistance programs. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless the client has a need for life insurance.

28. WHY INCLUDE LIFE INSURANCE?
Let’s use the example of the 55 year old dentist:
$253, (e)(3) Contribution
$137,278 WL premium (using Rev. Rul )
In a 33% tax bracket client would have to gross $204,893 to net the $137,278 premium on an after-tax basis.
Pre-Tax vs After-Tax
Annual Savings
Savings Over 5 Years
204,893 – 137,278
$67,615
$338,075
What is the benefit of funding the life insurance on a pre-tax basis? If we look at the 55 year old dentist, his total contribution to the 412e3 plan is $253,859. Of that amount, he can allocate up to $137,278 as whole life insurance premium in the plan. If he were to purchase the same premium outside the plan, and he was in a 33% personal income tax bracket, he would need to gross $204,893 to net the $137,278 after-tax premium. Paying the premiums pre-tax saves $67,615 annually. And the entire contribution of $253,859 is deductible. Over five years the savings on the life premium is $338,075. But what happens if this participant dies after five years?
The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ.
Benefit formula: % of compensation for each year of participation less than 25 years.
NL Life Builder life insurance, form series 8311/8311ID(0306), standard non-smoker, unisex rates; max 2/3rd rule and Flexible Premium Annuity, form series 9614/9614ID(0307), issued by National Life Insurance Company, Montpelier, VT. The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ. Products may not be available in all states. All insurance values shown are guaranteed. Guarantees are dependent upon the claims-paying ability of the issuing company. Contributions are calculated based on the guarantees in the products.

29. LIFE INSURANCE – WHEN REMOVED FROM QP$
SIDE FUND
Cash Value
Net Amount at Risk
LIFE POLICY
Paid income-tax free to beneficiary.
Economic Benefit “PS-58” taxable annually
Taxable Minus Accumulated PS-58 Basis
Fully Taxable Upon Distribution
When life insurance is removed from a qualified plan, the cash surrender value minus the economic benefit cost paid each year the life insurance policy was in the plan, will be taxable to either 1) the plan participant or 2) the plan participant’s named beneficiaries.
The net amount at risk (the death benefit – cash value) passes income tax free to the plan participant or, if deceased, to the participant’s named beneficiary.

30. DEATH BENEFIT TO BENEFICIARY
INCOME-TAX FREE* DEATH BENEFIT
Face Amount of Life Insurance
$4,806,594
Fair Market Value Prior to Death
333,530
Economic Benefit Cost Paid
-29,223
Taxable to Beneficiary
304,307
Income Tax-Free Death Benefit Proceeds
$4,502,287
Life insurance in the plan completes the plan. If our dentist client were to die while still a participant in the plan, the beneficiary would get the value accumulated in the plan side fund account but would also get the death benefit of the life insurance.
Looking at our example, if our dentist dies after 5 years of participation in the plan, what portion of the life insurance would be taxable to the named beneficiary? The life insurance face amount is $4,806,594 and the fair market value prior to death is $333,530. The fair market value less the economic benefit costs paid by the participant, would be taxable to the beneficiary, or $304,307. The economic benefit cost paid over 5 years was $29,223. The pure death benefit of $4,502,287 (face amount – cash value) would pass to the beneficiary income-tax free.
If the participant had lived, and removed the life insurance from the plan, she would pay tax on the $304,307, at her personal income tax bracket. By paying the premiums with pre-tax dollars over the past 5 years, the dentist saved $338,075. So even though the beneficiary has to pay tax on the fair market value of the life insurance the tax paid is smaller than the pre-tax savings.
*IRC§101(a)(1). There are some exceptions to this rule. Please consult a tax professional for advice concerning your individual situation.
The above example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the setup of any particular plan and your results likely will differ.

31. 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 a participant leaves the plan, there are various options available for removing the life insurance policy from the qualified plan. They 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

32. 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.

33. 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 
A common question for plan participants is “What happens if, at some point in the future, I cannot continue to make large contributions to the plan?”
While ideally the plan trustee is maintaining the contribution level specified in the 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. 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, the business 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 the 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 the 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 

34. 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 a business 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 a firm to meet service requirements to become fully vested in their benefits.
The business owner can also help secure his/her own retirement through benefits that are not dependent on the sale of the 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!

35. QUESTIONS?

36. (Please conclude by delivering this very important message)
As you can see, we have quite a story but the great thing is it’s a simple one….
The National Life Group is a national company comprised of passionate people who care about the needs of their customers.  While we represent different products, different issuing companies, and operate across all the geographies and cultures of the U.S., we are at the core a single company that has delivered on its promises for 166 years.
For Agent use only-Not for Use with the Public.
TC 84540(415)3

37. Disclosures Footnote 1: 412(e)(3) Annuity Only
Reflects guaranteed value of the fixed annuity to fund the defined monthly benefit at retirement. This is calculated in accordance with IRC Section 412(e)(3).
Footnote 2: 412(e)(3) with Life Insurance
Reflects guaranteed value of the fixed annuity and guaranteed cash value of the life insurance contract to fund the defined monthly benefit at retirement. This is calculated in accordance with IRC Section 412(e)(3).
Footnote 3: Max Monthly Benefit
Defined in accordance with IRC Section 415.
Footnote 4: Lump Sum Value at Retirement
The lump sum payments under a defined benefit plan are limited by the provisions of IRC417(e) and IRC415(GATT). The lump sum total is actuarially determined and assumes the defined monthly benefit is paid as a single life annuity. The lump sum is comprised of the cash value of plan funding options (including the cash surrender value of the life insurance, if applicable) as of the defined retirement age. If the participant chooses to take distribution of the life insurance contract, the cash surrender value of the contract will comprise a portion of the distribution. These numbers are shown before taxes, which may reduce the funds available to you.
Footnote 5: Insurance Death Benefit
This is the guaranteed death benefit provided by the life insurance contracts purchased in the plan.