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Jakyasar

Floor-offset DB plan - life insurance for owner only

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Good evening:

Not sure the following is right and/or passes BRF.

A floor offset plan - assume 401a26 passes. After all offset are applied, only the owner has a substantial benefit in the DB plan. Only the owner is HCE.

So far so good.

Now the agent wants to provide insurance to the owner under the DB plan, thinking since no one has any benefits and plan passes 401a26, kosher, right? Also, they do not think that they need to provide any insurance under the DC plan.

I am not in agreement for the following reasons (the ones that come to mind - possibly missed a few):

1- Any insurance provided to the rank&file (or NHCE) under the DC plan is not of the same value as the one provided to the owner under the DB plan;

2- For any insurance provided to the rank&file under the DC, the premiums have to be paid thru their benefit i.e. the contributions provided to them by the employer where in the DB plan, only the employer pays as contribution to the plan and does not reduce any benefits;

3- There is BRF issues for DB and combined plans.

4- As per some prior information I heard, even if the DB plan provided a benefit to the rank&file employees (say 2% and the owner gets 10% of pay), the insurance provided is not of equal value (even if calculated the same way, say 50X) due to the discriminatory type of benefit formula. The DC portion would not make it equal due to the reasoning I provided on item 2 above.

5- How is 410b satisfied?

Please let me know your thoughts/comments on this and if I missed anything and/or misunderstood.

Thank you

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"The agent wants to provide insurance..."

You may have inadvertently hit the nail on the head.

Bottom line you are correct for all reasons you state and then some.  Ask the agent if the insurance co will opine that what is proposed meets the BRF requirements and if the ins co will indemnify the employer should the IRS disagree.  Of course they won't.  Every policy sold says the ins co is only standing behind the terms of the policy contract, and not any tax treatment. 

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This was almost an identical set of assumptions that Norm Levinrad presented in one of his sessions at ASPPA.

He described it as "indefensible shenanigans" if I remember correctly.

WCP

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Revisiting BRF issue with insurance as trying to find a safe way to have insurance for all without violating BRF issues:

 

Revised plan approach

Combo DB/DC

DB will be integrated safe harbor formula

DB will have insurance for all participating

DC will be group based and will cover all including the owner – not a uniform/safe harbor formula

All will be eligible for insurance

 -------------------

Q1: Is the above ok for BRF?

Q2: Is the above ok if the DB has excluded employees but all covered under DC?

Q3: If under the DC plan, the rank&file opts out of insurance and provides this election in writing, is this ok for a free pass under BRF? What if they are also excluded under the DB plan?

Q4: If the rank&file is not insurable, is this a free pass on BRF?

 

Thank you for your comments

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1 hour ago, Jakyasar said:

Revisiting BRF issue with insurance as trying to find a safe way to have insurance for all without violating BRF issues:

Revised plan approach

Combo DB/DC

DB will be integrated safe harbor formula

DB will have insurance for all participating

DC will be group based and will cover all including the owner – not a uniform/safe harbor formula

All will be eligible for insurance

 -------------------

Q1: Is the above ok for BRF?

Q2: Is the above ok if the DB has excluded employees but all covered under DC?

Q3: If under the DC plan, the rank&file opts out of insurance and provides this election in writing, is this ok for a free pass under BRF? What if they are also excluded under the DB plan?

Q4: If the rank&file is not insurable, is this a free pass on BRF?

Thank you for your comments

1.  No floor-offset, right?  Probably works.  

2.  If the DB will pass coverage on a stand-alone basis, yes.  If not, no.

3. Probably - Facts and circumstances need to be able to document that the insurance was effectively available if challenged.  Again if DB passes coverage on its own, shouldn't affect DC and its insurance.

4. DC, probably OK.  DB - plan docs will typically say how to deal with uninsurable (or not insurable at standard rates).  I haven't really looked at this in years as I follow the Bob Schramm rule on life insurance in plans.

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Thank you for your response. To confirm my understanding on the coverage, 70% ratio test, correct?

Will check on the uninsurable issue within the DB plan - never saw but may need to closely look (as never had to deal with it).

I agree with Bob Schramm rule.

Thank you

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As a follow up question, for the DB coverage testing, assuming 410b, can it be ABPT or must be ratio?

Using a safe harbor formula - integrated and excluding certain employees and it makes a huge difference ratio vs ABPT.

Any comments are appreciated.

Regards,

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The DB would have to meet both the reasonable and non-discriminatory classification requirements of -4 of the 410(b) regs to rely on ABPT for coverage testing. 

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