Bill Presson

No contribution has to be made (just be mindful of the incidental benefit rules), but forget for a moment that it's insurance. Just think of it as two mutual funds and you're moving money from fund A to fund B. For these purposes that's about all you're doing. Obviously report it correctly on the 5500.

This is an answer from rocknrols2 on an earlier thread on the same topic and I'm pretty sure it's still accurate. "If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her. If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her. If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan. "

The plan's distribution rules still apply. So if the participant is eligible for an in-service, then they can take the money out. If they aren't eligible, then they can't. Nothing changes there.

+1 Excellent post! Very helpful and very specific.

Not the loan, but the proceeds from the loan. At that point it's just cash and an asset just like any other asset.

Not always true, especially with policies issued by mutual companies. Quite often the death benefit will continue to rise so that the net amount at risk remains at least as large as the original purchase.

Bill, forgive my ignorance in this area - I am not real familiar with life insurance, so would appreciate your insight. Do you have cites that would back up this option? How would this transaction be taxed - what value is used? It seems like the DOL uses one amount for fair market value, and the IRS uses something very different (like that has never happened before!). Hard to summarize the bizarre insurance part, but here is a very good article. http://documents.jdsupra.com/29f2aeae-4b95...36082865956.pdf

Why can you not file an amended return at this point and check the final box?

Another option is for the plan to borrow a percentage of the cash value and then have the participant buy the policy for the lower cash value amount. Assume for the minute that the cash value and the fair market value are exactly the same. If the cash value is 30,000, the plan could borrow $27,000 (for example) and then the participant buy the policy for #3,000. The $27,000 would stay in the plan with the rest of the participant's investments and be handled like any other cash. The partiicpant would then be responsible for the premium payment and the loan interest. If the policy is with a mutual insurance company, one option is to change the diviidend method to reduce premiums instead of additional paid up coverage. Often if the policy is pretty old (like this one sounds), the dividend will pay the premium completely and the participant can decide what to do on the loan interest. This is an important option for someone that can't qualify for new death benefits.

I agree that the premium comment needs clarification. As to why put it in a plan as a general asset: though I don't see it very often, I have seen it as a way to protect the employees retirement future if the owner of a small business dies.

Don't make this too hard. Forget the death benefit for the moment. Just think about the cash value (assuming there is a cash value) as the equivalent of a money market fund. The "premiums" are just deposits from one asset to another.

These are just pooled assets and are allocated pro rata just like any other assets. The premiums are just expenses of the trust. Now I'm assuming that the trust is paying the premiums and NOT the employer.

So dinner and a kiss first?

Actuaries are funny!!

IF you have an employer EIN (not ss#) and you are at John Hancock, I don't think there is a requirement to get a plan/trust EIN. But that's not what you asked.

I'm almost positive that the owner is required to get an EIN for the plan, whether they are producing 1099's or not. But I haven't been able to put my hands on the backup for that. I'll keep looking today as I have time.

Doesn't matter what you do because you can't bill for it.

But the tests themselves have changed quite a bit as well. I got my QPA in 1991. You think it's the same test today? Of course not. But I don't "rank" people based on when they earned the designation.

On another note, those are interesting plan provisions. When would someone hired full time on 8/15/2011 enter the plan? 7/1/2013; here is the service provision: For purposes of Non Elective Contributions, after having completed a Year of Service, an Employee shall begin participation on the first Entry Date following the six month anniversary of his or her Employment Commencement Date with the Employer provided, however, that he or she shall become an Eligible Employer no later than upon the completion of 1,000 Hours of Service within a 12 consecutive month period and the attainment of the minimum age requirement, if any. I say 7/1/2012. Completes the year of service on 8/15/12 and would enter on the "first Entry Date following the six month anniversary of his or her Employment Commencement Date". That date is 2/15/12 and the first entry date is 7/1/12. This appears to approximate a one year; nearest entry date provision, but it's pretty crappy wording if you ask me.

Before I did a lot of work "correcting" this, I would do a little on a spreadsheet to see what the net impact was to a handful of employees. Because you basically went to the forfeiture account, deducted fees, allocated forfeitures and ended up with a participant account balance. What should have happened is look to the forfeiture account, allocate forfeitures, deduct fees and end up with a participant account balance. Do some and see how far off you are. You might be able to do a nominal correction; rather than reversing and reposting everything.

Hopefully for the 8 employee plan, the employer will look even harder and find the signed copy. For the 230 employee plan, does the CPA have a copy that they used for the audit?

Got the same thing from Accudraft. What a waste of time. (not directed at Accudraft or Relius, but our stupid government.)

Obviously, it's the Plan Administrator's (read Employer's) final decision, but if a participant has a letter from the mortgage company indicating "pay or we start the foreclosure process", we've always recommended approval. We've also had some of them reviewed on audit by both IRS/DOL without any issue whatsoever. I wouldn't do it without something in writing from the mortgage company, but I don't understand some of the harsh stances here. Just how close are you wanting people to get to foreclosure before "rescuing" them?

When the employee contacted the benefits dept and they said there was no election, they should have insisted on having the employee completing one at that time which would have greatly mitigated their liability. Pretty silly when an employee points something out and HR does nothing.

Can some one point me to the relevant regulation that says the final year will be a short plan year. Thank you See page 4, bottom left, short plan years. http://www.dol.gov/ebsa/pdf/2010-5500inst.pdf