32. Fully-insured IRC 412(e)(3) plan rules

Statement of Requirement: IRC 401(a)(4), 404(a)(2), 403(a), 411(b)(l)(F), 412(e (3); Treas. Reg. 1.401(a)(4)-3(b)(5); Rev. Proc. 2023-37, 10.02(2)(f)(vi), 10.02(2)(k)

Document Provision: _____

Sample Plan Language:

(Note to reviewer: This LRM #32 contains miscellaneous definitions and rules applicable to fully-insured IRC 412(e)(3) plans. A statutory hybrid plan that is funded exclusively through insurance contracts described in IRC 412(e)(3) may not be a Pre-approved Plan.

Section A provides the definition of frozen projected benefit. This definition must be contained in all fully-insured IRC 412(e)(3) plans and must be provided in lieu of LRM #24 (definition of frozen accrued benefit). Providers that wish to provide employers the option of adjusting the frozen projected benefit in accordance with Treas. Reg. 1.401(a) (4)-13(d) should also include LRM #25 in their plans.

Section B provides restrictions on past service contained in the safe harbor for insurance contract plans in Treas. Reg. 1.401(a)(4)-3(b)(5) (see number 4 in note to reviewer preceding this LRM #32).

Section C provides the special accrual rules in IRC 411(b)(1)(F) for fully insured IRC 412(e)(3) plans and should be used instead of the accrual rules in LRM #31.)

Sample Plan Language:

A. DEFINITION OF FROZEN PROJECTED BENEFIT:

The participant's frozen projected benefit is equal to the participant's projected benefit under the plan on the latest fresh-start date (or the date the participant terminated service, if earlier) multiplied by a fraction, the numerator of which is the number of years of credited service as of the latest fresh-start date, and the denominator of which is the total number of years of credited service plus years of service projected through the later of the year the participant attains

67 | Defined Benefit Plan LRM Package 06/2026

normal retirement age or the current plan year.

If, as of the participant's latest fresh-start date, the amount of a participant's frozen projected benefit was limited by the application of IRC 415, the participant's frozen projected benefit will be increased for years after the latest fresh-start date to the extent permitted under IRC 415(d) (1). In addition, the frozen projected benefit of a participant whose frozen projected benefit includes the top-heavy minimum benefits provided in section ____of the plan will be increased to the extent necessary to comply with the average compensation requirement of IRC 416(c)(1) (D)(i).

(Note to reviewer: The blank should be filled in with the plan section number corresponding to LRM #70.)

If: (1) the plan's normal form of benefit in effect on the participant's latest fresh-start date is not the same as the normal form under the plan after such fresh-start date and/or (2) the normal retirement age for any participant on that date was greater than the normal retirement age for that participant under the plan after such fresh-start date, the frozen projected benefit will be expressed as an actuarially equivalent benefit in the normal form under the plan after the participant's latest fresh-start date, commencing at the participant's normal retirement age under the plan in effect after such latest fresh-start date.

If the plan provides a new optional form of benefit with respect to a participant's frozen projected benefit, such new optional form of benefit will be provided with respect to each participant's entire projected benefit,and the participant's projected benefit minus the participant's frozen projected benefit will be equal to at least 0.5% times the participant's years of service after the fresh-start date, up to and including the year the participant attains normal retirement age (or current age, if later).

B. RESTRICTIONS ON PAST SERVICE IN BENEFIT FORMULA:

The current benefit formula may not recognize years of service before an employee commences participation in the plan. Notwithstanding the foregoing, a plan with a current benefit formula that was adopted and in effect on September 19, 1991, may continue to recognize years of service prior to an employee's participation in the plan to the extent provided in the plan on such date. The preceding sentence does not apply with respect to an employee who first becomes a participant in the plan after that date.

C. SECTION 412(e)(3) PLAN ACCRUAL RULES:

This plan is funded exclusively by the purchase of individual insurance contracts, except for any top-heavy side-fund trust maintained for purposes of meeting the minimum benefit requirements of IRC 416(c). Contracts will be purchased to provide all benefits under the plan.

All contracts will provide for level annual premium payments to be paid for the period commencing with the date that each individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective) and extending to the normal retirement age for each such individual.

Benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a state to do business with the plan) to the extent premiums have been paid.

68 | Defined Benefit Plan LRM Package 06/2026

The premium payments for a participant who continues benefiting after normal retirement age are equal to the amount necessary to fund additional benefits that accrued under the plan's benefit formula for the plan year.

All benefits are funded through contracts of the same series which must have cash values based on the same terms (including interest and mortality assumptions) and the same conversion rights. A plan does not fail to satisfy this requirement, however, if any prospective change in the contract series or insurer applies on the same terms to all participants in the plan.

No rights under any contracts will be subject to a security interest at any time, and no policy loans, including loans to participants, will be made at any time.

Each participant's accrued benefit as of any applicable date is the cash surrender value of the participant's insurance contracts, or, if greater, the cash surrender value the participant's insurance contracts would have had on such applicable date if (1) premiums payable for such participant's years of participation for the current plan year and all prior plan years under such contracts had been paid before lapse and (2) no rights under such contracts had been subject to a security interest at any time, and (3) no policy loans were outstanding at any time.

(Note to reviewer: Additional benefits may have to be provided when the plan is topheavy. These benefits may be funded as fully insured or by a side fund trust without affecting the plan's status as satisfying the above described fully insured requirement. See Treas. Reg. 1.416-1, Q&A M-17 and LRM #70.)