Life Insurance In A Frozen Plan

[Guest merlin]

A split-funded plan currently requires an insurance multiple of 100x the expected monthly retirement benefit. What happens if benefits are frozen? The 100x will be exceeded in all instances. Must the insurance be reduced? If so,what happens if the freeze is lifted? It will almost certainly cost a lot more to replace the coverage at a later age than it would had the policies been continued.

[AndyH]

Merlin, it would seem to me that 100 x insurance would result in an amount equal to 100 x the accrued benefits. I would think that you could keep that and consider it to be incidental, but how would you justify something above 100 x the accrued benefit as being incidental?

[Guest merlin]

Andy, I'm not sure I understand your answer, but I think we're at the same conclusion. The insurance multiplier is always applied to the NRB. If insurance =100xNRB, and AB=1/2NRB I now have insurance =200x if I freeze the benefit, which violates the incidental rules and the policies will have to be reduced. I was just wondering if there was an exception available under these circumstances.

[AndyH]

right. that is what I meant. The NRB equals the AB. I know of no exception to the incidental benefit rules for a frozen plan, and I'd be willing to bet that there is not one.

[Mike Preston]

It is a fiduciary decision as to whether or not to maintain the insurance. A policy that will pay something in excess of the death benefit allowed under the plan will result in a gain for the trust upon death.

[AndyH]

Yes, I agree if the Trust is the beneficiary, and then it would be a general investment.

I guess it depends upon the wording of the document.

But I don't see how it is an option for a Fiduciary to maintain death benefit policies that according to plan terms are payable to participants, with such amount violating the incidental limits, not to mention violating the the terms of the plan.

[Mike Preston]

It is a general rule that all policies maintained by a trust should have as their beneficiary the Trust, no? To do otherwise risks disqualification, although I guess I can envision cases where it is the apprpriate thing to do. But certainly not if the policies have the potential of exceeding the incidental limits, as in this case.

[david rigby]

Not sure if the original post wanted to change the life insurance, but death benefits above the J&S are not protected under 411(d)(6).

Also, I think the original question is saying that the insurance in force prior to the freeze now exceeds the 100 x AB amount ? If the plan administrator maintains that coverage, then death will give the plan a large gain, but the insurance is probably term coverage, so not likely.

[AndyH]

Merlin, all of these comments touch upon potential problems. I'd be curious to see exactly what the document says.

How much insurance should/can be purchased. What are the limits; are there "safe harbor" limits in the document? . What is paid upon death, and how does it flow, directly to the beneficiary, or as a pass through from the Trust to the beneficiary. So, in other words, is there a control to avoid disqualification by paying excessive death benefits? Mike is saying there should be such control, which certainly I agree with, but I'm not sure there always is. I know I've seen agents set up insurance as being paid directly to beneficiaries, which clearly is problematic.

[FAPInJax]

Depending on the number of people involved, it may be possible to keep some or all the insurance IF the plan goes under Revenue Ruling 74-307.

[Guest merlin]

Andy,

1.The insurance is 100x the monthly retirement benefit.

2.The pre-retirement death benefit = insurance+pvab-cv,as long as

3.The plan's general payment provisions require that all payments come trough the ttee. The wild card, as you and Mike have pointed out, is the life insurance beneficiary designation. If the bene is the ttee, no problem,the ttee pays the appropriate amoount according to the terms of the plan. If the bene is someone other than the ttee there may be an issue.

This is a client that may be looking to reduce his plan contribution. The idea of freezing benefits is just in the "what if" stage at this point. I'm just trying to get my ducks in a row. All your comments have been very helpful. Should the freeze come to pass I think my recommendation will be to reduce the insurance.

Thanks to all.

[AndyH]

Then it would seem that your "what if" is answered.

I was wondering if the document has the 100 x limit or the "aggregate annual contribution" language.

Since the document does not necessarily limit you to 100 x as the incidental limit, you could if you wanted to attempt to justify a higher level of insurance under the aggregate annual contribution approach. That might be high maintenance.

I think that approach is in Frank's cite.

[Guest merlin]

Andy,

The plan calls for insurance to be purchased using the 100x rule. The death benefit limit uses the 74-307 rule which presumably would generate a much larger number,giving more room ion the pvab side. "High maintenance" is an understatement. I'll tell them to reduce the insurance.

[david rigby]

Does the plan require the purchase of insurance or merely permit? If the former, then a plan amendment might be in order.

[Guest merlin]

The insurance is mandatory. The plan doc was drafted by an attorney, so if all of this ever comes to pass he'll have to deal with any amendments that may be required.