Jump to content

Recommended Posts

A client has insurance in a defined benefit plan which names the sponsor as beneficiary.  One of the insureds died and the benefits were paid to the sponsor consistent with the beneficiary designation.

Intuitively, I believe that having a beneficiary other than the plan, itself, represents, at minimum, a prohibited transaction.  I have been unable to find any citations or guidance to support this.

Does anyone have any insight here?

Share this post


Link to post
Share on other sites

The plan sponsor has an insurable interest if they would suffer an income loss by the death of their employee. Maybe they also have some form of severance liability to the insured's family.  Now there is also the taxation issue of who if any paid the PS-58 cost, and how they recover their investment?

Share this post


Link to post
Share on other sites

The sponsor certainly has an insurable interest in a key person's life but if it wanted to insure someone's life it should pay the premiums.  I don't see any circumstance where it would be permissible for the plan to pay premiums and the sponsor be the beneficiary.

I'd want to know what the intent was and then...try to fix it.  It's a pretty serious screw-up, whether it was intentional or just accidental (where the plan was intended to be the beneficiary).  In either case it is gross incompetence on the part of the agent, and the insurance company as well.

In all circumstances, the plan should be the beneficiary, even if it is a "directed" by the participant in a DC environment.  I've heard of buying insurance as in investment in the context of a pooled account; the concept being that key person insurance is appropriate to make up for lower contributions, or perhaps even the termination of the company and plan, in the event of a key person's death.  That's irrelevant to this situation but I mention it as a possibility of someone's (flawed) thinking in a DB plan.  I guess it might be a permitted investment in a DB plan but I've never seen insurance in a DB as anything other than part of a benefit.

  • Like 2

Share this post


Link to post
Share on other sites

Sounds like someone was trying to purchase key-man life insurance and thought the cheapest method (ie, tax-advantaged) is to use plan money for paying the premiums.  (Just a hunch, there is an insurance broker somewhere who as the ear of the client/executive.)

  • Like 1

Share this post


Link to post
Share on other sites
On 9/19/2019 at 1:49 PM, Dalai Pookah said:

A client has insurance in a defined benefit plan which names the sponsor as beneficiary.  One of the insureds died and the benefits were paid to the sponsor consistent with the beneficiary designation.

Intuitively, I believe that having a beneficiary other than the plan, itself, represents, at minimum, a prohibited transaction.  I have been unable to find any citations or guidance to support this.

Does anyone have any insight here?

Need to clarify: it is the employer named as beneficiary, not the plan?  That is a problem.

The correct way to do it is the beneficiary of the contract should be the plan, and then the plan pays the beneficiary of the participant.  However, it is certainly not a PT for a named beneficiary (say, the spouse of the participant) to be named.  It shouldn't be done that way (but it often is) because that can cause a serious coordination problem with the actual death benefit payable from the plan (including the insurance).  For example, if the participant named his girlfriend instead of his spouse as beneficiary, the spousal required benefit might be compromised. But, it ain't a PT. However, naming the employer is a potential problem.

Now, the finesse is that if the employer is also named as the plan administrator (as is the case in all our plans), I could argue that the employer was paid in the role as PA and is holding the funds for the appropriate plan beneficiary.  I wouldn't like that, but that's the argument I would make.  And I would have the beneficiaries change to the plan (assuming this was a take over; we have almost no insurance contracts left in any of our plans).

Share this post


Link to post
Share on other sites
7 hours ago, david rigby said:

Sounds like someone was trying to purchase key-man life insurance and thought the cheapest method (ie, tax-advantaged) is to use plan money for paying the premiums.  (Just a hunch, there is an insurance broker somewhere who as the ear of the client/executive.)

Almost certainly the case. Seems to me would be a 4975(c)(1)(D) use of plan assets for benefit of DQ'ed person.

Share this post


Link to post
Share on other sites

Agree with Luke.  Good reference point is KENNEDY v. PLAN ADMINISTRATOR FOR DuPONT SAV. AND INVESTMENT PLAN, where The Supreme Court relied on the Plan Documents Rule. Essentially, the notion that ERISA is governed by the terms of its plan and there is no requirement that an administrator look to external documents or other external evidence in order to carry out his ERISA obligations. 

Share this post


Link to post
Share on other sites

To Xtitan--Yes, this is a qualified plan.  I'm looking for some citation demonstrating that when the plan purchases an insurance contract naming the plan sponsor as beneficiary that this is ab initio a prohibited transaction.

Share this post


Link to post
Share on other sites

Good thought, Larry, on sponsor being PA.  In this case, however, we are faced with co-owner died, money went to company and they think this is fine and don't want to pay it as benefits.

My job, proving that they can't do this.

Share this post


Link to post
Share on other sites
3 hours ago, Dalai Pookah said:

I'm looking for some citation demonstrating that when the plan purchases an insurance contract naming the plan sponsor as beneficiary that this is ab initio a prohibited transaction.

You're not going to find a cite that says "when a plan purchases an insurance contract naming the plan sponsor as beneficiary this is ab initio a prohibited transaction."  You have the appropriate cite from above:

On 9/20/2019 at 4:52 PM, Luke Bailey said:

4975(c)(1)(D) use of plan assets for benefit of DQ'ed person

Verbatim:  (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

Share this post


Link to post
Share on other sites
6 hours ago, Dalai Pookah said:

Good thought, Larry, on sponsor being PA.  In this case, however, we are faced with co-owner died, money went to company and they think this is fine and don't want to pay it as benefits.

My job, proving that they can't do this.

I don't think you have ever told us what the DB plan provides as to an insured death benefit.  What is the plan PROVISION with regard to insurance in this DB plan? What might provide some useful ammunition. Also, FWIW, a DB plan cannot provide "key man" insurance (unlike a profit sharing plan).

  • Like 1

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...