DEFINED BENEFIT PLANS / 412 I   Section 412(i) Plans   Note: A Section 412(i) plan is a type of defined-benefit, qualified retirement plan. Because of the plan's recent popularity, we cover it separately here. A combination of statutory changes and regulatory/ compliance burdens made defined benefit plans increasingly less popular in the 1980s and 1990s. The net effect of these changes was to—   •        allow smaller deductions for contributions to defined benefit plans, •        increase the likelihood of penalties for compliance failures, and •        increase the risk that plan actuarial assumptions would be attacked.   Some of these problems related to the intricacies of the minimum funding standards of IRC Sec. 412. For example, the "full funding limitation" restricted the amount that could be contributed and deducted. If the funding rules were the problem, then a plan that was exempt from the minimum funding standards could be the answer. A defined benefit plan that meets the requirements of IRC Sec. 412(i) is such a plan.   Section 412(i) Plan Defined   A Section 412(i) plan is generally a defined benefit plan in which—   •        plan benefits are funded entirely by individual annuity contracts or a combination of annuity and life insurance contracts issued by an insurance company (i.e., a fully insured plan); •        the contracts must provide for level annual premiums that begin when an employee becomes a plan participant and end no later than the employee's retirement age under the plan; •        the plan benefits must be equal to the benefits provided under each contract at the plan's normal retirement age, and must be guaranteed by an insurance company to the extent premiums have been paid;   •        all premiums due on these contracts are paid for the current plan year and for all prior plan years; •        rights under these contracts are not subject to a security interest at any time during the plan year; and •        no policy loans against these contracts are outstanding at any time during the plan year.   The Appeal of Section 412(i) Plans   Some of the reasons Section 412(i) plans are attractive are the following:   •        there is no full funding limitation or current liability test to limit the employer's deduction, thus making larger contribution deductions possible; •        due to the insurer's rates used in 412(i) plans, the contributions (and, therefore, tax deductions) available for older owner-employees can be significantly higher; •        with increased funding, larger benefit payouts are likely at retirement, subject to IRS limits; •        if death occurs before retirement, a portion of the beneficiaries' death benefit is income tax-free rather than fully taxable as is the account value typical in other retirement plans;   •        individuals whose personal portfolios and defined contribution accounts were hurt by the general market downturn in 2000-2002 may find the guaranteed values and safety of principal in a 412(i) plan attractive; •        plan assumptions are not subject to attack, since they coincide with the guarantees in the insurance contracts; and •        these plans are exempt from the minimum funding standards.   Disadvantages   Section 412(i) plans also have disadvantages:   •        less investment flexibility than other qualified plans; •        the plan cannot allow loans; •        if a sustained bull market returns, 412(i) plans will not participate in the growth, and defined contribution plans may regain the favor they enjoyed in the 1990s; and •        they probably have limited appeal outside small and/or family corporations, where large allocations can be made to the accrued benefits of the owner(s).