Disability rider to a 401K plan....

[K-t-F]

Anyone heard of this? Financial planner asked me the following:

"I am researching the prevalence and viability of adding a disability rider to a 401(k) product. "

[GBurns]

Now you have me wondering how good my memory still is.

Somehow I had it in my head that a good 401(k) plan had this feature and that a large number of those that I had come across had this feature.

[david rigby]

Please clarify what would such a "rider" do?

[MGB]

Before describing the rider, what is a "401(k) product"?

It sounds like we are talking about a no-premium-payable rider to a whole life insurance policy in a DC plan.

[GBurns]

The plans I remember had an "imbedded" long term DI policy for this "benefits completion" feature with premiums paid out of either the employee's election or the match. I even vaguely remember a PLR in about 1999 on this.

By "a 401(k) product" I understood a pre-packaged plan such as provided by Manulife, Principal, ADP, Fidelity etc.

PATA

Is this what you mean?

[Belgarath]

A profit sharing plan is allowed to have incidental life or accident or health insurance for the participant or his family. 1.401-1(b)(1)(ii). So I see no problem with this as long as the premium stays within the incidental limts. We don't allow insurance in our 401(k) plans anyway, because it is such a PIA to attempt to administer, but that's another issue.

[K-t-F]

Here is the response I received when I asked how it worked....

"It is, in effect, an insurance policy to protect the contributions to a 401(k) account. Today, if a person becomes disabled and are receiving monies from their disability insurance, their contributions to a qualified plan cease. However, if they have a rider on their qualified plan, a premium payment for this disability insurance would be taken from their contributions pre-tax. In the even they become disabled, a pre-defined amount would be contributed to their qualified plan while they are disabled. In this sense the qualified plan is the immediate beneficiary of a disability insurance policy. The contributions from the plan, are immediately vested and could be available for qualified withdrawals.

A Private Letter Ruling by the IRS in 2002 validated the legality of pre-tax contributions and premiums, and post-tax benefits, etc. A few companies have jumped on the wagon and started officially offering this rider. Corporate Compensation Plans (www.corpocompinc.com) has a pretty good explanation of the whole thing, but today, this is primarily being offered by insurance carriers (Cigna, Mass Mutual, etc) as a adjunct to their 401(k) plans"

[KJohnson]

Here's the PLR:

http://www.benefitslink.com/IRS/plr200031060.html

[Jon Chambers]

Here's an anecdotal reply--prevalence is low (I've never seen a plan use this option, although I've seen it marketed, and was generally aware of the PLR). Viability is reasonable, due to the PLR, although I can envision numerous operational problems, particularly with prototype plans. I'd guess the viability would be highest where the "401(k) product" is a bundled arrangement with an insurance company that also offers the disability coverage, and integrates the disability coverage with the 401(k) arrangement.

That being said, I'd make absolutely certain that all commission/compensation arrangements were investigated and disclosed--my guess is that the bulk of the benefit to these arrangements goes to the insurance broker that sells them!

[david rigby]

...the bulk of the benefit to these arrangements goes to the insurance broker that sells them!

I'm shocked! Shocked!