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Dougsbpc

Life Insurance in Two Plans

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We took over a traditional DB plan and 401(k) plan with 5 participants. Both plans are sponsored by the same employer and have whole life insurance. It appears each plan meets the incidental benefit rule. DB benefits are under 100 x expected monthly benefits and 401(k) plan premiums are less than 50% of aggregate contributions. In addition, it appears that all participants in both plans have comparable coverage.

Is there a problem with participants having this much life insurance across two plans?

Thanks.

  

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There isn't necessarily any "problem" - this used to be quite common in the "old days" but not so much any longer. Is the DC plan self-directed or trustee directed? One big issue is fiduciary prudence, and whether the life insurance is a "good" or "prudent" investment, particularly in a DC plan. You are likely to find some strong opinions on this subject on these boards.

Personally, I'm not a fan of insurance in DC plans, and that's putting it mildly. In a DB plan that doesn't require employee contributions, where the employer has to fund the full plan benefit, then to me it is less of an issue, although in a 412(e)(3) plan, a participant's benefit is usually lower at all ages until NRD if life insurance is used, rather than all annuity.

The other problem is the taxable term cost, which is currently payable by the participants. Particularly as they get older, they may not enjoy getting currently taxed on life insurance that they might not want or need.

Other folks may have other opinions.

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not a problem for the broker!

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Well if Ned has successfully sold the client on the need for insurance, and all participants don't have comparable DB benefits, having insurance in both plans may be the only way to pass BRF testing it seems to me.  But I guess that would also require that the employer fund additional DC contributions sufficient to pay the premiums in the DC plan.

Having recently taken over a couple of combo plans with insurance only in the DB I wondered if this was being done in other cases to pass BRF.

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