ErnieG

We frequently use life insurance in both Profit Sharing and Defined Benefit Plans (when there is a need for survivor benefits). However, I have also frequently encountered the scenario you are outlining. While the strategy fits all the legal requirements if you are abiding by the PTE and the Rev. Proc. it generally lacks economic sense. First, I am assuming there is a valid business entity, second there will be “recurring and substantial” contributions to the plan; third and last, why? The premium is before tax, but the FLP will have to purchase the policy at its FMV as shERPA stated or be distributed with tax due at the FMV. With high cash value policies, the cash value, more than likely, will equal the FMV. Where is the leverage? Assume in 4 years $20 million has been paid in premiums $2.5 x 2 x 4) and there is $19 million in cash value (my experience has been with some carriers’ high cash value contracts the cash value is generally 95% of the premiums paid. Some questions: Is the exit strategy for the policies documented? Does the FLP have the cash to purchase the policies to avoid the tax? Can the FLP pay the tax? If the participants die within the 4 years while the policies are in the plan the beneficiaries will only receive a portion of the death benefit income tax free (the face amount minus the cash value) as opposed to the enitre face amount. Are they prepared to pay the economic benefit each year (also known as the PS 58 or Table 2001 rate or the carriers one year term rate if it is available and regularly sold to the public)? Is there additional cost of administration (TPA fees)? Is the client's other professional advisors (tax and/or legal) on board with this strategy? What happens after 4 years to the policies, who is paying the premiums? Would it be more efficient to spread the premium payments out, more than 4 years, and have IRA distributions pay the premiums?

It has been my understanding that contributions to a Profit-Sharing Plan must be “recurring and substantial” over time for a plan to be considered ongoing and remain viable [Treas. Reg. § 1.401-1(b)(2)]. If the contributions cease to be made, I believe a complete “discontinuance of contributions” has occurred in which would trigger Plan termination and complete (100%) vesting of participants’ accounts [Treas. Reg. § 1.411(d)-2(a)(1)]. This contrasted with a “suspension of contributions” under the Plan, which is merely a temporary cessation of contributions by the employer. We have, in these cases where the employer wishes to suspend their Profit-Sharing Plan, established a Money Purchase Plan with 0 contribution. I am curious as to the wording of the amendment and how it would satisfy the “substantial and recurring” element not to be considered a discontinuance of contributions.

Although this, as stated, is an immediate annjuity, I believe the rule would apply regarding taxation from the plan. In order for the transfer to be nontaxable, one condition is that the annuity contract must be "nontransferrable" [IRC Section 1.401-9(b)] I may be incorrect with the immediate annuity distribution but I cannot locate any language that makes a distinction in such Section. Would like to learn otherwise.

Thank you.

I came across a business owner that implemented an "Individual" Profit Sharing 401(k) Plan back in 2011. Accordingly this do it yourself approcach did not include an employee that was hired in 2014 and still employed. Does anyone have a recommendation for an ERISA Attorney in the Fort Worth, TX area that could prepare and file the VCP?

Purplemandinga these Plans, if properly designed and administered remain viable. As mentioned, the IRS has issued guidance on these Plan however, if the Plan was properly established, the account value should not exceed the cash value as the dividend option should have been to reduce future premiums. The fact that this Plan may be out of 412(e)(3) compliance may mean it is not a 412(e)(3) Plan afterall and could be administered as a Tradional Defined Benefit Plan.

Is the owner a self-employed individual? Any portion of the employer contribution used to purchase insurance for a "self-employed" individual is not a deduction under §404(e). The self-employed individual does not get to deduct the economic benefit portion of the premium and therefore creates no basis for that individual. The policy may be purchased at the Fair Market Value (FMV), with no basis applied), and RMDs may begin at 72.

I agree with Bird. Similar to multiple policies in a Defined Benefit Plan on a participant (policies purchased to meet the operational wording in the Plan Document, usually in increments of $10,000), the economic benefit (PS 58 cost) is reported in total from all the policies. Therefore the basis may be recouped in total. I have not reviewed a cite that would dictate othewise. This is unlike the basis rules for life insurnacde outside a Plan where the basis follows the contract.

It is my understanding, referring to IRS Notice 2005-58 and Treas. Reg. Sec. 1.457-11 as the most recent guidance, a Federal Credit Union may establish either plan. However if they are establishing an ineligible plan under 457(f) it must also meet the document and operational compliance with both 457(f) and 409A.

We approach this by separately testing each Plan, we do not combine them. If life insurance is being used in the DB portion it must pass on its own. The downside is less goes to the HCEs, you lose the ability to use the DC Plan's contributions. We'd suggest using life insurance outside the Plan to cover the HCEs on a Non Qualified Deferred Compensation arrangement.

Rev. Rul. 54-51 requires that for the life insurance to be "incidental", the policy must be converted to a retirement income or distributed to the participant no later than the normal retirement date under the plan. Rev. Rul. 57-213 clarified that the life insurance policy may continue beyond the normal retirement age, provided the participant does not elect to retire. I doesn't matter if they are taking in-service distributions or RMDs provided they continue to work.

I agree with Bill, it absolutely makes no economic sense to purchase life insurance with after-tax dollars in a Roth 401(k). Your paying premiums with after tax dollars same as you would outside of the Plan. Any cash value increases (dividends or interest) grow tax deferred with potential income-tax free distributions (for Non Modified Endowment contracts) via return of basis and loans. It is also my understanding that the taxable term cost to the participant (the Table 2001 or the old PS 58 costs) are applied to the participants cost based on the employer's payment of premiums, the case of a qualified plan the plan's payment of premiums, no tax or economic benefit on the inside buildup. Considering the participant is paying tax on the entire premium in a Roth, I don't understand how there could be a taxable term cost. I cannot find a specific site on this and I'm only going on the affect of a pre-tax taxable term cost.

CB agreed, thank you.

duckthing, thank you. I understand the statutory service requirement. What I am questioning is, does the reference to "elective deferrals" apply to Roth contributions as outlined in the SECURE Act §112?

Would appreciate opinions/comments on this. Going through §112 of the SECURE Act referencing elective deferrals for long-term part-time employees. Section 112 (a)(1) references §401(k)(2)(D) which is the Code Section that allows for a cash or deferred arrangement. Section 112 does not reference §402A relating to Roth contributions. Therefore a long-term part-time employee can make elective deferrals but not Roth contributions. Is this an oversight? Or am I missing something? Thank you.

In a Defined Benefit Plan that permits a survivor benefit funded with life insurance the benefits, rights and features must be available on a nondiscriminatory basis.

Thank you.

Ray: Some life insurance carriers have niches in this market for these plans and have proved their compliance with the spirit and intent of the Rules and Regulations. Considering your request and without full discovery of your situation these plans are for those is are risk averse and looking for guarantees. I know of three life insurance companies that offer administrative services and specific products designed for this market (Security Mutual, Guardian, and Lafayette Life).

Does your employer offer an Employee Assistance Program? A solution may be to go through the EAP, which is confidential.

Agree with Luke. Good reference point is KENNEDY v. PLAN ADMINISTRATOR FOR DuPONT SAV. AND INVESTMENT PLAN, where The Supreme Court relied on the Plan Documents Rule. Essentially, the notion that ERISA is governed by the terms of its plan and there is no requirement that an administrator look to external documents or other external evidence in order to carry out his ERISA obligations.

One more point, no commission splits if the decision is made to include partially funded with life insurance.

Security Administrators, Inc. $1,250 plus $50 per participant. Great plans if done properly.

They are covered by ERISA, however not by Title I of ERISA. Title I deals primarily with the rights of participants under a plan and includes requirements for: reporting and disclosure, fiduciary responsibility, vesting, minimum standards for participation, and minimum funding standards. [Reg. 2510.3-3(b)]

Agreed with justanotheradmin the contracts may have been surrendered to the Profit Sharing Plan. However, a good place to start on the status of the policies and carrier would be the NAIC's website: https://www.naic.org/documents/consumer_alert_locate_lost_life_insurance_benefit.htm

The accrued benefit in a fully insured plan is determined by the cash value of the underlying guaranteed contracts.