ErnieG

Sad but it is dying valuable strategy with few experienced in this area. The last generation of Pension Actuaries who used slide rules to do calculations has retired and those in the industry with the knowledge are going off of old yellow pad notes. The EOB is a great source and so are the individuals on this message board.

FPGuy you could put the policy on Reduced Paid Up (RPU) however that will not provide relief to the annual "incidental benefit" testing without further contributions to the Plan. In situations similar to this, the best course of action is to remove the policy from the Plan.

Regarding the basis, he does have basis as an employee in the current Plan. He can, with a total account transfer to the Owner Only Plan transfer the basis. However, the problem will be as an Owner Only he does not create future basis in those policies (unless he opts to operate as a C-Corporation), the economic benefit is taxed and not deductible, therefore no basis is created. He would have to separately track the prior basis transferred. He would also need to begin RMDs in 2027 if the Owner Only Plan is established in 2026. Each year he would need to obtain the FMV of each policy for calculating his RMDs.

acm_acm: As Peter captioned if the economic benefit has been reported by the insured then the "net death benefit" passes income tax free to the beneficiary. The "net death benefit" is the face amount minus the cash value. The cash value and other assets may be transferred to an IRA. There is basis to the beneficiary that may be recouped. It is important that these details be explained and working closely with the client's tax or legal advisor.

BG5150: In addition to the check the Plan Administrator will also need to determine the tax-free death benefit and the taxable portion from that check, provided this was paid from the participant's account and they were reporting the economic benefit (PS58 costs). The Insurer can easily calculate this on the date of death.

Peter: I have interpreted a Fidicuay's duty of Prudence “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use…” 29 U.S.C. §1104(a)(1)(B) “circumstances then prevailing” to include participant characteristics, including their likely level of investment sophistication. Also, wouldn't we turn also to the DOL Interpretive Bulletin 96‑1 that fiduciaries must consider: “the investment experience and sophistication of the plan participants” when determining the adequacy of information and education provided. I believe this is not isolated to education but used when evaluating whether a lineup is prudently structured.

Peter: I don't see how a Plan Fiduciary can act for the "sole benefit" of the Plan participants and beneficiaries under ERISA §404(a)(1)(A) when choosing alternative investments as an investment option. Assuming procedural prudence has been used, and the Plan is intended to comply with ERISA §404(c) (which is not a shield), how is having alternative investments in an investment line-up for the "sole benefit" when participants typically lack sophistication, liquidity constraints can impair participant rights Fees, valuation, risk are harder to monitor, and disclosure requirements are more complex. “The prudence of a particular investment decision depends on the facts and circumstances… including the participants’ level of sophistication and the plan’s investment objectives.” [29 CFR §2550.404a‑1(b)(1)] My belief is this will raise the Fiduciary bar. While have alternatives in a QDIA, Target Date or Risk Adjusted Fund may lessen the risk, there remains the Plan Fiduciaries' process of choosing such Fund with alternatives as it relates to fees, performance, liquidity, etc. Plan Fiduciaries when considering this type of investment should be prepared to defend the choice considering, "...the participants’ level of sophistication and the plan’s investment objectives." This also assumes the Plan Fiduciaries have complete knowledge of these alternatives, or they have hired an expert.

This is all good until the first wave of lawsuits hits. Despite the "safe harbor" there remains the procedural prudence of why this type of investment is good for the rank-and-file not just the owners now have access to these investments with much lower thresholds to get in.

Kay

Lay: The client would need to obtain the Fair Market Value (FMV) of the life insurance policy to determine the value, which may or may not be the Cash Value. It may be the $620,000 or some other value based on the year-end FMV combined with the other assets.

Could not agree more. However, I believe we are going to see more issues as AI becomes more prevalent with the "do-it-yourselfers". We've referred a handful of cases over the past several months to ERISA Attorney's for correction of a host of issues when the "do-it-yourselfer", or their other "professional advisor", realizes there is an issue.

truphao: There is a bias against using life insurance however done correctly with professionals versed in such usage works well. I'm not clear on the "loss of money" considering some contract used in this market have high first year cash values (95% of premium), and as I had outlined earlier, there must be a need for life insurance protection (just a question of how are you paying for it). The life insurance may not be transferred to an IRA, and yes to purchase they individual would have to come up with the fair market value, but some strategies would be to take a loan on the policy to reduce the fair market value to a point that is workable for the individual. Also those professionals in using such strategies with life insurance plan for the distribution before the sale is made so the client is prepared for the exit strategy.

Yes provides an income tax free death benefit (face amount minus cash value assuming the participant reported and paid tax on the annual economic benefit). This assumes there is a life insurance need. Using permanent whole life insurance provides guarantees for the fixed return portion of the portfolio.

truphao, the life insurance carrier will provide both the Fair Market Valuation and the annual Economic Benefit Report. If the carrier is versed in using life insurance in a Qualified Plan both reports are generated and sent to the Plan Sponsor annually. Upon separation from service the life insurance generally can be surrendered, distributed, or purchased.

Unless you’re also in the business of providing tax or legal advice we only provide a recommendation to seek such professional counsel.