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I have a very very very very high degree of expertise in life insurance policies. In fact I can teach anyone everything they will ever need to know about life insurance in just a few short words: Avoid life insurance in plans at all costs!!! This has been a Public Service Announcement.

Two more things to consider. Insurance in a plan is a benefit, right, or feature. If the insurance was offered only to the HCE, you have a discrimination problem. (Even if it's a voluntarily added benefit, the fact it wasn't offered can create a discrimination situation.) In addition, if your plan doesn't permit insurance (as many preapproved documents have a provision where you select whether the plan allows insurance), you have an operational failure for allowing it to be in the plan. Just sayin' ...

But, are you as good as Ned Ryerson?

Yes, I have experience with situations in which an employer absorbs plan-administration expenses for only those of the participants who are current employees. The key about the significant-detriment rule is that a no-longer-employed participant’s account must be charged no more than her fair share of plan-administration expenses. Unless the plan’s documents expressly obligate the employer to pay the plan’s expenses, a plan may charge the plan’s prudently incurred reasonable expenses against the individual accounts of the plan’s participants, beneficiaries, and alternate payees. “Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses[,] or only expenses on behalf of certain plan participants. [S]uch payments by a plan sponsor on behalf of [some] plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, [a] plan[] may charge vested separated participant accounts the account’s share ([for example], pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are [not] charged such expenses[.]” DoL-EBSA, Allocation of Expenses in a Defined Contribution Plan, Field Assistance Bulletin 2003-3 (May 19, 2003). However, a retirement plan must provide that a vested benefit that exceeds $5,000 (or, soon, $7,000) may not be distributed before normal retirement age without the participant’s consent. ERISA § 203(e)(1), 29 U.S.C. § 1053(e)(1); accord I.R.C. (26 U.S.C.) § 411(a)(11)(A). Interpreting both the tax-qualified-plan condition and the ERISA provision, a Treasury rule provides that a participant’s “consent” to a distribution is invalid if the plan imposed a “significant detriment” on a participant who doesn’t consent. 26 C.F.R. § 1.411(a)-11(c)(2)(i). To interpret this significant-detriment rule, the Internal Revenue Service stated its view that a plan may charge the accounts of former employees (even while not charging current employees) if the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. The Revenue Ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts. But a plan doesn’t run afoul of the significant-detriment rule merely because it charges beneficiaries’, alternate payees’, and severed participants’ accounts the charge that would fairly result if the administrator allocated expenses uniformly among all individuals’ accounts. Rev. Rul. 2004-10, 2004-7 I.R.B. 484, 485 (Feb. 17, 2004). Whether a particular allocation of plan-administration expenses meets that standard and otherwise is proper in particular circumstances turns on all the documents, facts, and circumstances.

Without knowing all the facts, # of years of non-compliance, plan assets and premium amounts, etc., I'd be a little surprised if the IRS would allow a normal VCP fix on this. This is what I'd call an "egregious" failure. But, if you do submit, I'd try the anonymous procedure first - might at least give you some indication if/how it might be corrected. Edit - I'd like to soften this stance a bit - for some reason, I had it in my head that this was a 1 person plan, and re-reading it, I can't imagine how I got THAT idea stuck in my head. So there may be a lot more room for fixes here.

What does it mean "overfunded"? Is the plan overfunded in terms of Assets > PVAB based on 8 years of participation since 2015? Or is it overfunded even when you look at 10 years of participation in 2024? In the latter case you definitely want to start paying accrued benefit (as in service distribution) to avoid the problem from growing bigger. Most likely it is a number play. I would also review 2023 return through 06.30 (I am seeing 12-13% for some of my clients) and would try to guesstimate what the new 415 limit will be for 2024. Another hidden surprise there - what if interest rates shoot over 5.50%? We are not far off right now, what if rates keep on increasing - your LS will take a dive on account of that. All in all it is a huge waste of valuable time IMHO. This is unless you get paid by an hour and then it becomes a very interesting and rewarding multi-year actuarial math exercise.

The "deemed not Top Heavy" is a year by year determination. Get rid of the policy or the premiums driving a contribution and you get rid of the problem in the future. Doesn't help for 2022 but if the premium hasn't been paid already by the company in 2023 there may be time to fix it.

Staying within the incidental limits is key. People often think you can use the "aged" money and just avoid the incidental limits, but that's just treated like an in-service withdrawal. Likely better to look at transferring the policy out of the plan.

My understanding is once you have $1 dollar allocated that doesn't meet the exemption, the Plan loses the "deemed not top-heavy status", there is no distinction in the code as to whether that allocation goes to key employees or non key employees. A work around though possibly not practical is to set up a 2nd plan profit sharing only that covers only the participant getting the allocation and spin his policy into that newly created plan. That only works if the participant is an NHCE or you'll violate BRF but I'm hoping he is an NHCE already or you might have the same problem within the current plan.

See IRS Notice 2013-74: "Q-9. Is an in-plan Roth rollover treated as a distribution for purposes of determining eligibility for the special tax rules on net unrealized appreciation (“NUA”) in employer securities paid in the form of a lump sum distribution under § 402(e)(4)(B)? A-9. Yes. An in-plan Roth rollover is treated as a distribution for purposes of determining eligibility for the special tax rules on NUA, whether the rollover is made by an in-plan Roth direct rollover or by an in-plan Roth 60-day rollover. See also Q&A-7 of Notice 2010-84." This goes to determining the amount that is taxable related to the conversion and the basis in the Roth account. If circumstances are such that a distribution in employer securities is made from the Roth account before the account has aged 5 years, then the basis will factor into taxation of the NUA on the securities at the time of distribution. This will be very complicated if there are other assets distributed concurrently with the stock, or if there have been multiple in-plan Roth rollovers involving employer securities. These transactions have their own pro-ration rules between the ordinary income on the other assets and the NUA related to the employer securities. Definitely seek knowledgeable, professional expertise for those calculations.

A few suggestions for ways to think about your question: Many BenefitsLink neighbors remind us that an answer to a question about a retirement plan often might be answered by RTFD—Read The Fabulous Document. That reminder might help too with a health plan. If the employer’s or labor union’s health plan is self-insured—that is, the benefit is provided other than by a health insurance contract, the plan’s documents state which coverage or coverages a participant (or continuee) may or must not choose. Would it be odd for one health plan to allow more than one non-insured general medical coverage? Because such a self-insured health plan’s benefits are not paid by a health insurer, might a coordination between distinct coverages be awkward because all benefits are paid by the same obligor?