3812 / What is a fully insured, or 412(i) plan?
A “fully insured” defined benefit pension plan was originally subject to IRC Section 412(i). These are defined benefit plans that are entirely funded by life insurance and annuity contracts. After the passage of the Pension Protection Act of 2006, the term 412(i) became a misnomer because that legislation restructured the IRC and these plans are now governed by IRC Sections 404(o) and 412(e)(3). No substantive changes were made to the law.1
These plans have found favor in the advisor community because they offer the ability to deduct contributions similar to other defined benefit pension plans but are not subject to the funding that requires certification by an actuary each year with the filing of a Schedule B. This exemption requires that the status and operation of the plan follow very strict rules; if violated, these rules require the plan to operate as a traditional defined benefit pension plan including the filing of Schedule B. When a Schedule B is required to be filed and is not, the Form 5500 that was filed becomes delinquent, triggering a possible $1,000 a day fine.2
A fully insured plan is also subject to all of the qualification requirements that apply to any other defined benefit plan, although it should be noted that the funding arrangement is not a qualification requirement. The general qualification requirements are explained at Q 3838 to Q 3935 and plan-specific qualification requirements are explained at Q 3715 to Q 3716, Q 3733 and Q 3736.