The Overlooked Power Move In Corporate Retirement Planning
Most executives think retirement strategy begins and ends with a 401(k). Maybe a profit-sharing plan, if the company is generous. But for business owners, CFOs, and boards looking to gain a competitive edge—both in talent retention and tax strategy—there’s a rarely discussed hybrid solution that combines certainty, selectivity, and outsized deductions: the 412(e)(3) plan, especially when layered into a floor-offset design.
This combination, largely ignored in modern benefit conversations, deserves a fresh look—particularly for companies with over 125 employees who already fund generous 401(k) matches or profit-sharing.
412(e)(3): A Pension Built on Guarantees
A 412(e)(3) plan is a type of defined benefit pension plan that's fully insured through fixed annuity or whole life insurance contracts. Unlike traditional pension plans, it does not require an actuary to determine contributions, nor does it rely on fluctuating investment returns. The plan’s benefit is guaranteed by the insurer, and the funding obligation is fixed and predictable (IRS, 2023).
The plan gets its name from the Internal Revenue Code section that exempts these fully insured pensions from certain minimum funding standards (IRC §412(e)(3)). That alone makes it attractive. But the real appeal lies in the annual tax deductions—often exceeding $300,000 per participant depending on age and income—making it a favorite among older, high-income business owners.
The Floor-Offset Plan: A Strategy for the Enterprise Class
So where does this fit for large employers—especially those who already offer a robust 401(k) and profit-sharing plan?
Enter the floor-offset plan, a design that allows companies to offer defined benefits (like those from a 412(e)(3) plan) to a select group—typically senior executives—while offsetting those benefits with existing contributions already being made across the entire workforce (Independent Actuaries, n.d.).
Here’s how it works:
The floor: A defined benefit or fully insured 412(e)(3) plan that guarantees a retirement benefit to a target group—say, the top 50 execs in a company of 3,000 employees.
The offset: A profit-sharing or 401(k) match that is already being contributed, often around 7.5% of employee compensation. For most employees, this completely offsets their floor benefit (IRS, 2023).
The result: Only the executive group receives any net pension contribution, while the plan still passes nondiscrimination and top-heavy testing (IRS, 2024; IRC §401(a)(4)).
This allows large organizations to provide selective pension benefits while maintaining compliance across the workforce; you could call it a “VIP Pension Plan”
Big Companies, Bigger Possibilities
Let’s make this real.
Assume a large company—say, a logistics firm with 2,500 employees—already offers a 5% 401(k) match and a 2.5% discretionary profit-sharing allocation. It’s already investing in its people. But it’s also struggling with executive churn, with key leaders being poached by competitors offering deferred comp and other golden handcuffs.
By implementing a floor-offset plan using a 412(e)(3) structure, the company could:
Guarantee pensions to its top 50 executives with no reliance on market performance (Pentegra Retirement Services, 2024).
Offset funding costs using the existing 7.5% contributions already made to rank-and-file employees.
Create significant tax deductions for funding executive pensions via insurance contracts.
Reduce risk and admin through level-premium insurance funding (IRS, 2023).
If the average executive is in their late 50s earning $350,000–$600,000 per year, the company could be funding $200,000–$400,000 per year per executive in tax-deferred pension contributions—without increasing total workforce compensation spend.
That’s a strategic upgrade—not just a perk.
Key Advantages
Massive deductions
412(e)(3) plans allow some of the largest annual tax deductions of any qualified plan (Porte Brown LLP, 2024).
Guaranteed outcomes
Benefits are contractually defined and insured, not reliant on market performance (IRS, 2023).
Selective participation
Floor-offset designs let companies focus pension benefits on key executives while satisfying IRS nondiscrimination rules (IRS, 2024; IRC §401(a)(4)).
Simple compliance
Since the “offset” plan already covers most of the workforce, the defined benefit layer can remain narrowly targeted (Independent Actuaries, n.d.).
The Compliance Framework
Floor-offset designs are entirely permissible under ERISA and IRS regulations—but they must be executed correctly. Some key considerations:
Uniform contributions across the defined contribution plan (usually 7.5% or more) (IRS, 2023).
Minimum top-heavy benefits must be met—generally 2% × years of service if the plan is deemed top-heavy (IRS, 2024; IRC §416).
Insurance policy design is critical in 412(e)(3)—contracts must be level-premium and non-cancelable (IRS, 2023).
IRS nondiscrimination testing still applies, but the offset design helps ensure fairness by reducing DB plan benefits for non-HCEs (highly compensated employees) (IRS, 2024; IRC §401(a)(4)).
The IRS even offers specific guidance in Treasury Regulations and in IRC §401(a)(4) on how these structures can be legally implemented.
Who Should Consider This?
This isn’t for everyone. But if your company meets the following criteria, you’re a prime candidate:
You offer at least a 7.5% 401(k) + profit-sharing contribution.
You have 125+ employees but want to create additional value for top execs.
You’re seeking predictable retirement funding, not subject to market volatility.
You value high-level retention tools that compete with nonqualified deferred comp—without the balance sheet liability.
From large private firms to publicly traded entities with flat stock prices, the 412(e)(3) + floor-offset combination offers a way to bring back the pension—without bringing back the administrative complexity.
Final Thought: It’s Time to Rethink the Retirement Ladder
As the economy evolves, so too must the strategies companies use to retain top-tier talent. We’re entering an era where stability and predictability are competitive advantages. Volatility in markets, interest rates, and geopolitics is no longer the exception—it’s the norm. For employers, this demands benefits that demonstrate long-term commitment and financial foresight.
The workforce is diverging. Younger employees may seek flexibility, but senior leaders increasingly prioritize security, tax efficiency, and guaranteed retirement outcomes. For them, compensation isn’t just about today—it’s about the endgame. A 412(e)(3) plan, especially in a floor-offset structure, provides that endgame in a form that is deductible, contractual, and guaranteed.
Compared to deferred comp or equity plans—which often bring risk, complexity, and balance sheet exposure—the 412(e)(3) approach offers clarity and control. It tells key employees: You matter. Your future matters. And we’re planning for it.
In an era of labor shortages, demographic shifts, and rising executive mobility, the firms that win will be those that build certainty into compensation. A guaranteed pension, selectively deployed, might be the most modern benefit strategy of all.
