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B21

cash balance with life insurance

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I understand that if a cash balance plan (or any defined benefit plan) permits the purchase of life insurance policies that this benefit has to be offered to all participants to satisfy the nondiscrimination requirements. Does this mean a policy has to be issued on behalf of each eligible participant or only that the participant has to be provided the option to have a life insurance policy purchased on their behalf? I thought, unlike a defined contribution plan, a participant cannot make an election to include a life insurance policy in a defined benefit plan.

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In a Defined Benefit Plan that permits a survivor benefit funded with life insurance the benefits, rights and features must be available on a nondiscriminatory basis.  

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The policies will be made available to all eligible participants both highly compensated & nonhighly compensated. Therefore, this would pass the 410(b) ratio test for BRF.

Am I correct?

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17 hours ago, ErnieG said:

In a Defined Benefit Plan that permits a survivor benefit funded with life insurance the benefits, rights and features must be available on a nondiscriminatory basis. 

But what does "available" mean in that context?  It's either in the plan or not ("insurance benefits are X times monthly benefit").  I don't see any participant discretion there, except perhaps by refusing to complete an app.

I am curious as to how this would work in a CB plan (i.e. "offered" or mandated).  Seems like DB concepts should apply.  Personally I don't like insurance in plans but was asked this very Q and appreciate any insight.

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1. The employer pays the premium, therefore what is there not to accept (other than PS-58 costs)?

2. As shERPA implied, if the CB passes nondiscrimination testing on a stand alone basis (which is rare), the rules would be similar to a regular DB plan, but if it is aggregated that usually means NHCEs get more in the DC plan, so that has to be taken into account to determine whether the insurance is discriminatory, i.e. insurance levels compared to benefits from both plans.

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3 hours ago, B21 said:

The policies will be made available to all eligible participants both highly compensated & nonhighly compensated. Therefore, this would pass the 410(b) ratio test for BRF.

Am I correct?

Not really.   In a true DB plan the employer pays the cost of the ancillary death benefit, it does not reduce the normal retirement benefit.   So there really isn't any "election" to be made.   Why would employees opt out of a free (to them) benefit?   

DC plans are different - the premium comes out of the account, so the participants pay the cost of the death benefit in a reduced retirement benefit.  Here there is a valid choice to be made by participants.  

Death benefits have to be non-discriminatory.  If they are a function of the retirement benefits that are also non-discriminatory, all's well.  So the death benefit (e.g. 100x the monthly benefit) is non-discriminatory in a DB providing non-discriminatory retirement benefits.

But now, suppose the DB plan is tiered - 415 max to owner, 0.5% benefit to NHCEs, then paired and tested with a DC plan for non-discrimination.  The DB benefits are discriminatory on their own, that's why it's aggregated with the DC plan.  So if a death benefit (100x for example) is provided in the DB plan only, the death benefit is also discriminatory.  If the NHCEs death benefit that would be non-discriminatory is provided in the DC plan, that's a problem too because it reduces the projected retirement benefit in the DC plan.   If the DB plan provides a death benefit that would be non-discriminatory based on some theoretical non-discriminatory retirement benefit that the DB plan doesn't actually provide, then the DB plan likely blows the incidental limitations.

CBs are typically a variation of this tiered DB.  The CB benefits themselves would be discriminatory, so any death benefits that were just a function of the CB retirement benefits would also be discriminatory.  If the CB is stand alone, then the death benefits would be non-discriminatory but again, the CB is a DB plan so the death benefit is employer-paid, so giving employees an opt-out for a free benefit is a non-starter.

Now there are lots of ways that some try to beat insurance into the plan using a "if it doesn't fit get a bigger hammer" approach.  Some say giving ees the "option" for insurance in the DC plan works - I don't see how.  Others figure out how much the death benefit needs to be in order to be non-discriminatory, then put it in the DC plan but also increase the ER contribution to the ees in the DC plan to cover the additional cost of the death benefit without reducing the retirement benefit needed to be non-discriminatory.   In a theoretical sense this might work, but I can't imagine a TPA being able to make a profit on this unless they are getting a commission split.  The fee-based market does not support the fees that would be necessary to adequately compensate us for this amount of brain trauma each year.  

I imagine there are a few other approaches as well.   For my own practice, retirement plans are complex enough as they are, I don't need to find ways to complicate them further, and I've never seen an rigorous economic analysis demonstrating the benefits of having life insurance in the plan.   So I choose not to go here. 

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I, personally, agree with shERPA. The one little niggling memory I have on this issue is that I attended a Q&A at an ASPPA Annual Conference (where Larry Starr was sitting next to me, so I know he heard it, too) where Kyle (Brown?) from the IRS made a clear and unequivocal statement that one looks solely at the DB plan in this circumstance.  I think, after hearing the comment, Larry went to the microphone to convince Kyle he must have misunderstood the question.  Kyle just shook his head and reiterated his position.  Not formal authority for sure but at least food for thought. 

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