ErnieG

The Fully Insured Plan would need to be amended. The prior balances need to be protected, usually with the purchase of single premium annuities. You need to look to the plan document regarding the life insurance, generally they must be surrendered, however the participant may have a right of first refusal to purchase (PTE 92-6) or have them distributed (paying tax and possible penalty). The purchase or distribution must be valued at the contracts fair market value (IRS has a safe harbor that may be used Rev. Proc. 2005-25 or the policy may be independently valued by a qualified appraiser). Fully Insured Plans are Defined Benefit Plans and must be funded (level) to NRA.

I.R.C. § 404(a)(6) Time When Contributions Deemed Made — For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

chc93, correct, no contributions where made in 2015 and 2016. A contribution was made in 2017 in an amount that provided a funding status of slightly over 100%. CuseFan, that was my initial reaction, irregardles of how much they contributed in 2017. I am trying to obtain the Actuary's rationale on why he/she felt no contributions needed to be made in 2015 and 2016. Thank you all.

Thank you and yes they made their first contribution in 2017. My concern was the fact that no contributions were made in the first two years of the plan and they started making contributions in the third year. Wouldn't this be a violation of the minimum funding standards beginning in year one and also in year two? Have you seen this methodology in the initial funding of cash balance plans, with a three year cliff?

I have not seen this before and would appreciate your insight and comment. A cash balance plan was established in 2015 with the plan year beginning 01/01/2015. In reviewing the Annual Funding Notice the company has not made a contribution to the Plan in the first two years of its implementation, 2015. Their Annual Funding Notice is confirming that no contributions have been made in 2015 and 2016. Their Plan Adoption Agreement clearly outlines the benefit that should have been funded for: [ X ] Group One:. An amount equal to: [ X ] $ 190,000 for each Determination Period. .[ X ] Group Two: An amount equal to: [ X ] $ 93,000 for each Determination Period. [ X ] Group Three: All Other Participants. An amount equal to: [ X ]2.50 percent of Compensation during the Determination Period. A contribution has been made for the 2017 plan year and the funded status is over 100% in 2017. My understanding is, in general the “minimum funding standards” requirement under the Code require sufficient assets in the Plan to meet the current liabilities. For example in 2015 and 2016 there is a Plan liability to provide the projected retirement benefit however no asset, contribution, has been deposited. My only thought is the company is not funding the Plan based on the vesting schedule which is a 3-year cliff. Therefore for years one and two (2015 and 2016) there is no benefit calculated because there are no benefits paid in the event a participant leaves service, no vesting. In year three 2017 they become 100% vested and are due the accrued benefit from the time they became eligible. I believe this approach is not correct. The “minimum funding standards” ensure that sufficient money will be available to pay promised retirement benefits to employee when they retire, no mention of when the vest. I have not seen this interpretation before and cannot locate a cite to justify its conclusion. Can this be possible? Do you agree with funding based on the vesting schedule or funding based on the retirement benefit once eligible? Your thoughts and comments, as always are appreciated.

Has the Doctor owner considered a non qualified approach in this situation for this non owner Dr.? That may be more attractive with more flexibility.

Grady as Lou S stated the Cash Surrender Value may or may not be the actual Fair Market Value of the contract. The carrier should value the contract's FMV, this will usually be based on the IRS' safe harbor calculations as Lou S outlined in the Rev. Rul.

Assuming the $110,000 is the Fair Market Value. The policy should be properly valued prior to the purchase.

Great replies, the answer is quite simple. Regarding your question and the reference to a distribution at 59 1/2 (per the Plan Document), my assumption is we are referring to a Profit Sharing Plan. The Trustees, have control over the investments in the Plan, life insurance being such an investment. The Plan Trustee, in my experience and to assure they are acting within their fiduciary capacity, would usually offer the participant the right of first refusal, to purchase the policy following PTE 92-6. Should the participants decline the purchase, and the fiduciary documents such, the contracts would be surrendered. As the Plan is the owner, the cash surrender value would be deposited to the Plan, and the pursuant to the terms and conditions of the Plan be either accessible or not to the participants.