ErnieG

This is a text book how not to. We design many of these especially now with gig and independent workers out there. It is not the plan that went south it’s the fact it did not have a TPA. We make it explicitly clear a TPA is needed from the start. The problem many vendors offer this type of Plan, offer a one-time Plan Document and that’s it. The issue also is with the “Google Advisor”—do it yourself, it’s cheaper.

Peter is on point. Usually, the insurance carrier prepares the PS 58 reports and forwards them to the employer. The employer then prepares the 1099-Rs. However, if the PS58 is not reported, taxes paid, the entire death benefit is taxable to the survivor. There is also no basis recovery.

The 100x rule is based on the projected monthly benefit at normal retirement age. Therefore, as the projected benefit increases so will the life insurance to maintain 100x's. If the projected monthly benefit is decreased, likewise, the life insurance would be decreased to maintain the 100x's and to remain incidental. You would also need to review the Plan Document and the life insurance carriers' limits regarding policy increases.

We provide both the tax deduction or the tax credits. We also caveat strongly the client needs to review the information with their tax and/or legal advisor.

bluehavana2 as Bill outlined, there is no such thing as a "Solo K", what they are is a Profit Sharing 401(k) Plan for owner's only, no common-law employees. The only difference is the TPA will usually charge a lower fee when there are no common-law employees. As Bill mentioned you will need to reach out to a TPA to assure your Plan remain compliant and prepare any necessary filing.

This is a function that may be outsourced, and it is more than just signing the Form 5500. The Plan Administrator is responsible for the day-to-day operation of the Plan. Our recommendation to business owners, who are not in the business of running a Qualified Retirement Plan, is to outsource this function. While the business owner continues to be liable for the actions of the choosing an outsourced Plan Administrator, they are relieved of those day-to-day operational issues.

Jakyasar: As Belgarath outlined the Plan may (if the Plan allows) purchase the policy from the insured and in accordance with the PTE. Despite the sentiment of many on these posts, the protection element of using life insurance, in some cases, makes sense. However, if an individual is paying for the policy with discretionary dollars outside of the Plan, why put the policy in the Plan, unless the goal is never to distribute the policy out.

We usually have advisors work with the client's Property & Casualty professional not only for the ERISA Bond, but also the check other coverages, such as Cyber Liability and Employment Practices Liability as they relate to the establishment and operation of the Plan.

Thank you, my misread. We are not a TPA but I have never seen a Fully Insured Form 5500 with zeros and I cannot locate any cite to indicate that it is not requiremed to fully complete the Form 5500. There are certain Schedules are not required though.

Just curious usually those Fully Insured Plans reach the $250,000 fairly quickly. You mentioned "no assets for many years", I would question that as those Plans, among others, have requirements that the Plan contracts must provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), and the benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a state to do business with the plan) to the extent premiums have been paid. This may not be a Plan under 412(e)(3).

As Bill points out the excess must be surrendered to maintain the "incidental benefit" and the terms of the Plan. Any excess cash value that would also be surrendered along with the reduction in death benefit would be earnings to the Plan.

Dante: We moved to PlanGen, and continue to establish Fully Insured Plans (with and without life insurance) when appropriate.

Naturally checking with their legal counsel, but generally Tratitional IRAs and Roths are protected up to $1.5million, SEPs, SIMPLEs and Qualified Plans are unlimited. However for the Traditional IRAs and Roths you'd need to check with the individual State as some States do follow the employer sponsored Plan limits.

Jakyasar: As a Defined Benefit Plan, Fully Insured Plans under Section 412(e)(3) are subject to the same RMD rules with the exception of the RMD is based only on the vested portion of the account balance. These Plans also usually use the annuity mentod and the terms and conditions of the annuity (or annuity and life insurnace) contracts would dictate the payout. Another method I've experienced, which is the norm, is either the contracts are surrender, the first RMD taken, and the remainder transferred to an IRA, or in some cases the annuity contract is "non-transferrable" (or some Carriers have IRA amendments written into their contracts) and removed from the Plan then annuitized.

What a can of worms…I see more work for attorneys and more regulation in our future…the story will continue. Glad we have this venue to discuss such issues, and vent (professionally).

Great discussion and good points. The sad truth is most business owners in the small to mid-size market wouldn't care it they are able to save a penny. We targeting TPA services, but what about banks? I've had clients and prospects move their Plan because the bank was waiver a favorable letter of credit in front of them. I am confident we do the right thing and regulations are geared at correcting a lot of these wrongs, which only impacts those that follow the rules. We press on and remember, we can only lead that horse to water!!!!!

How is a "valued employee" an HCE, you mentioned "employee who has no ownership". Unless she has ownership or is earning more than $150,000 (in 2023 increasing to $155,000 in 2024) she is not an HCE. Providing the Plan Document allows for such transfers and also allows employees to defer their RMD until separation of service, the only issue is of a potential increased RMD amount and increased beneficiary distributions (and tax) due to returns and compounding over the ten years.

Agreeing with all the comments, you list this under 401(k) but mention a "pension plan". Not knowing the amount they are looking to contribution would a SEP or SIMPLE, be an alternative, no permanency issue with SEPs or SIMPLE-IRAs.

I don't believe you can use 1099 compensation for Qualified Plan purposes. If they were "statutory employees" they would be receiving a W-2 and Box 13 would be checked.

We agree they need an opinion from another authority. From my experience, more than likely, they are employees (“if it looks like a rose, and smells like a rose…”). I don’t see how paying them as 1099 would qualify for as compensation for Qualified Plan purposes. However, a 1099 may be covered under a Non Qualified arrangement.

Jakyasar: I am not an attorney but are you opining on this from an employment arrangement or for Qualified Plan purposes. The final rule, which takes effect March 11, 2024, only revises the Department’s interpretation under the Fair Labor Standards Act (FLSA). It has no effect on other laws—federal, state, or local—that use different standards for employee classification. For example, the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors, and those laws are interpreted and enforced by different federal agencies. The FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state, and local laws that apply and ensure that they are meeting whichever standard provides workers with the greatest protection. For Qualified Plan purposes the FLSA doe not impact what we have know to be employee versus independent contract under Common Law Rules. The facts that provide evidence of the degree of control and independence fall into three categories: (i) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? (ii) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) (iii) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

For me, the "why not bring them in", aside from the politics of placing the retirement responsibility on the small business owner, is the pricing by TPAs (and rightfully so) of the Owner Only Plan to full pricing. The TPAs I work with generally have a discounted fee for Plans that have only an owner or owners. I fear this may be counter productive by that small business owner terminating or not starting, their Profit Sharing 401(k) Plan due to the increased costs to have this category of employee as a participant in the Plan for deferrals only.

truphao: The life insurance policy is an asset of the Plan, it is as any other asset, owned by the Plan and the Plan is the beneficiary. The employee maintains a beneficiary designation on file, similar to other investments. Upon the death of the insured the death proceeds are passed to the Plan. Upon claim of the Plan's assets by the beneficiary, the life insurance proceeds are split, the net death benefit represented by the face amount of the policy minus it's cash value, is passed to the beneficiary income-tax free. The cash value is added to the other investment and becomes a taxable distribution eligible for transfer/rollover to an IRA or other retirement plan that accepts transfers/rollovers. The 1099 issued reflects the death benefit and the eligible distribution. The calculation of the the net amount at risk and the cash value is performed by the life insurance company as of the date of date showing exactly the face amount and cash value. If there is any basis in the policy (recouped economic benefit cost, known as the PS 59 cost), that is the responsibility of the insured to track.

Considering the sentiment around life insurance in many of these forums which I respect, as a Planner, I am taking another approach. In addition to the 100X's Rule the Theoretical Reserve Rule under 74-307 is also used. We've seen offering this asset, life insurance, which is not correlated to the market, which offers guarantees, a potential for dividends or excess interest, a death benefit that is partially income-tax free at a small cost, and provides an exponential survivor benefit, makes sense in some (stressing some) cases. I believe we all agree we must get paid for our services, how and how much are driven by the client. With life insurance in many cases the totality of the commission received from the carrier offsets other fees that are being charged for various services to Plan and Employer. Bottom line, is it in the best interest of the client and are you fulfilling a fiduciary responsibility.

I agree with Bill, Insurance may be purchased on a participants life as a general trust investment, "key person coverage". This coverage is for the benefit of all participants and not solely for the benefit of any one participant. As a general trust investment the cash value would be included as the other investments on the Form 5500 as Bird points out. Upon the termination of the Plan the life insurance would be allocated per the Plan Document. I am assuming that the life insurance is owned by the Plan and the beneciary is also the Plan and would be curious as to why the owner feels he/she is entitled to the cash value. If the owner has been paying the PS 58 cost it may not be "key person coverage", however, if this is coverage as "key person" there would be no PS 58 cost reported. I would also like to see any minutes or fiduciary reporting that this investment, in the life insurance, was purchased as a general trust investment.