ErnieG

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.

We're going through this now, the employer Plan Sponsor has a change of mind after signing the Plan Documents, no Trust Account established, no funding. It is our interpretation that a Plan is established based on our reading of guidance that we can find from the PGGC addressing Title IV, "A plan is covered … upon the date of establishment or the effective date, whichever is later. Thus, your plan is covered on the date of establishment, which is normally the date on which the plan documents are executed.” Although this applies to PBGC coverage we feel this is a good interpretation of when a Plan is established. Additionally, ERISA Section 402(a)(1) requires a plan be established and maintained under a written document. In this case since we do have a written Plan Document there is a Plan and therefore needs to be formally terminated. This may be an ultra-conservative view and would appreciate if anyone else has a different view.

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.