412(e)(3) Contribution Limits: How the Benefit Limit Drives the Premium

Technical Summary: What Governs the Size of a 412(e)(3) Contribution

A 412(e)(3) plan has no separately stated contribution limit. The contribution is the premium the insurer charges to fund the benefit the plan promises. Federal law caps that benefit instead. For 2026 the annual benefit cap is the lesser of $290,000 or 100% of the participant's high-3 average compensation. Section 404(a) then limits the employer's deduction.

Owners of closely held businesses and professional practices usually ask this question when they want to know how much a 412e3 maximum contribution could be. The question tends to come up in succession or owner-compensation planning. In that setting, the business funds a pension promise to an owner-employee, and the plan holds insurance contracts as the funding mechanism.

The framework rests on three rules:

• Benefit cap. Section 415(b) of the Internal Revenue Code sets the benefit limit (26 U.S.C. § 415).
• Compensation cap. Notice 2025-67 sets the 2026 compensation limit under section 401(a)(17) at $360,000.
• Deduction limit. Section 404(a) limits "the amounts deductible in any year."

Before the Pension Protection Act of 2006, these plans were called 412(i) plans. Both names describe the same structure.

Definition: A Fully Insured Defined-Benefit Plan

A section 412(e)(3) plan is a defined-benefit pension plan, meaning a plan that promises a stated retirement benefit rather than an account balance. To be described in section 412(e)(3), the plan must be "funded exclusively by the purchase of individual insurance contracts" and must meet every requirement in subparagraphs (A) through (F) (26 U.S.C. § 412). A plan funded exclusively by group insurance contracts that regulations prescribed by the Secretary determine to have the same characteristics is treated as a plan described in that paragraph.

Section 412 generally applies to a plan with a trust qualified under section 401(a), but section 412(e)(2)(B) excepts an insurance contract plan described in paragraph (3). Under paragraph (3), plan benefits must equal the benefits each contract provides at normal retirement age, and a licensed insurance carrier must back those benefits "to the extent premiums have been paid." The contracts' level annual premiums are the contributions that fund the plan.

The IRS page Fully insured 412(e)(3) plans explains the history. Before the Pension Protection Act of 2006, these were known as "412(i) plans." A separate page covers the former 412(i) plan name.

Applicable Rules: Sections 415(b), 401(a)(17) and 404(a)

The benefit cap. Section 415(b)(1) provides that benefits exceed the limit if the annual benefit "is greater than the lesser of— (A) $160,000, or (B) 100 percent of the participant's average compensation for his high 3 years." The "annual benefit" is measured as a straight life annuity. A straight life annuity is a payment for life with no ancillary benefits. Other forms of benefit are adjusted to that equivalent. If benefits begin before age 62, section 415(b)(2)(C) reduces the dollar limit so that it equals an annual benefit equivalent to the dollar limit beginning at age 62.

Annual indexing. Section 415(d) directs annual cost-of-living adjustments to the $160,000 figure. Increases are rounded down to a multiple of $5,000. Notice 2025-67 states that, effective January 1, 2026, the section 415(b)(1)(A) limit "is increased from $280,000 to $290,000."

The compensation cap. Notice 2025-67 states that the section 401(a)(17) compensation limit increases from $350,000 to $360,000 for 2026.

The deduction limit. Section 404(a) allows plan contributions to be deducted only under that section, "subject, however, to the following limitations." For a defined-benefit plan other than a multiemployer plan, the deductible amount is determined under section 404(o) (26 U.S.C. § 404).

How the three rules fit together. Section 401(a)(17) limits the annual compensation that a qualified plan may take into account. Section 415(b) limits the benefit that comes out. Section 404(a) limits the deduction.

A separate premium rule. Section 264(a)(1) provides that no deduction is allowed for life insurance premiums "if the taxpayer is directly or indirectly a beneficiary under the policy" (26 U.S.C. § 264). For contributions to a qualified plan, the deduction rule this page addresses is section 404(a). The two rules are not interchangeable, and the page on premium deductibility under section 264 covers the first.

Requirements: The Section 412(e)(3)(A)-(F) Conditions

Six statutory conditions define the structure. Section 412(e)(3) describes a plan in which:

• (A) "the plan is funded exclusively by the purchase of individual insurance contracts";
• (B) the contracts "provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan." Payments start when the individual became a participant, or when a benefit increase takes effect;
• (C) plan benefits "are equal to the benefits provided under each contract at normal retirement age." The statute requires that an insurance carrier licensed under state law back those benefits, a contract feature that applies only "to the extent premiums have been paid";
• (D) premiums for the plan year and all prior plan years "have been paid before lapse or there is reinstatement of the policy";
• (E) "no rights under such contracts have been subject to a security interest at any time during the plan year"; and
• (F) "no policy loans are outstanding at any time during the plan year."

Section 412(e)(2)(B) exempts plans described in paragraph (3) from the section 412 minimum funding rules. A plan that does not meet these conditions is generally not described in paragraph (3), so that exemption does not reach it.

The IRS page on fully insured 412(e)(3) plans notes that the IRS issued guidance in 2004 and 2005 "to stop abuses involving the use of certain specially designed life insurance policies in retirement plans."

How the Rules Work: From Benefit Cap to Premium

The sequence starts with a business objective. That objective is usually funding a retirement benefit for an owner-employee as part of a planned ownership transition. The plan states the benefit, and the insurance contracts fund it.

Section 415(b) first caps the benefit the plan may promise. The insurer then prices contracts that provide that benefit at normal retirement age. Under section 412(e)(3)(B), the premiums must be level annual payments that run no later than retirement age. The premium is a function of the benefit, so the 415(b) ceiling limits the premium indirectly, through the benefit the contracts must provide.

Two factors change the premium needed for the same benefit:

• Participant age at entry. An older participant has fewer years over which to fund the benefit, which generally means a larger premium.
• The benefit start date. When benefits begin affects both the premium and, before age 62, the dollar limit itself.

Section 404(a) then sets limits on the amounts of employer plan contributions deductible in any year. Rev. Rul. 2004-20 states that contributions used to buy life insurance coverage above the participant's death benefit under the plan "are not fully deductible when contributed." Those amounts are carried over and are deductible in future years when other contributions taken into account for the year are less than the maximum amount deductible under the limits of section 404 (Rev. Rul. 2004-20).

This page states no premium figure. Premiums depend on contract terms and participant facts that vary by insurer and by person.

Who This Is For

Readers who ask how much can be contributed to a 412e3 plan tend to share a few characteristics:

• Steady cash flow. The business is usually a closely held company or professional practice whose cash flow can carry level annual premiums for years.
• Older owner-employees. For the same benefit, an older participant's shorter funding period generally produces a larger premium.
• Few employees. Employee headcount matters because section 401(a)(3) requires the plan to satisfy the minimum participation standards of section 410, and section 401(a)(4) requires that the plan's contributions or benefits "do not discriminate in favor of highly compensated employees" (26 U.S.C. § 401). Funding benefits for eligible non-owner employees adds to total plan cost.
• High earners. Notice 2025-67 sets the 2026 section 401(a)(17) compensation limit at $360,000 and the 2026 section 415(b)(1)(A) limit at $290,000. Under section 415(b)(1), the lesser of the dollar limit and 100% of high-3 average compensation caps the benefit, so for a participant whose high-3 average compensation exceeds $290,000, the dollar limit is the lower figure.

Whether the structure fits a particular business depends on facts this page cannot know. Those facts include headcount, ages, cash-flow stability and the owners' succession timeline. The overview of business life insurance places this plan among other funding uses.