Cross testing 412i

[FAPInJax]

I have not been able to find any firm documentation anywhere to explain how to do this. Supposedly, a block of business is available which requires this to be done.

Let's take the simple case. Normally, a DB plan will test on the change in accrued benefits from year to year (at least that is one of the testing options). However, a 412i has an accrued benefit equal to the value of the contracts used to fund the participant. Do we just convert the value to a monthly benefit and compare from year to year this way??

[Guest DFerrare]

Do you mean "general testing" instead of "cross testing"? There is an article in the Sep-Oct 2003 APSA Journal on 412(i) plans that might be helpful with general testing.

[Guest merlin]

Frank, are you sure the plan needs to be tested? There is a 412i safe harbor at 1.401(a)(4)-3(b)(5). Also, see the thread on this board "Top Heavy Status of a 412i Plan", 7/7/04. Blinky was a big help to me on that one.

[SoCalActuary]

Safe harbors are a nice tool when they work. However, general tested often works better, especially when you have multiple NHCE's. Some 412i plans just don't use the safe-harbor plan benefit formula, nor do they use a uniform benefit formula for all participants. In addition, you sometimes have exclusions or combo plans.

Consider using the projected benefit method for general testing, since the accrued benefit is not intrinsicly obvious in 412i.

[FAPInJax]

The client wants to use accrued benefit testing and the issue is truly that the plan does NOT satisfy the safe harbor rules (intentionally is my understanding).

I agree that projected benefit testing would be much simpler. However, would the technique work to convert current value of the contracts each year to determine the 'accrued benefit' for that year (the increases can then be compared from year to year).

[SoCalActuary]

If your 412i policies have reasonable level payment plans with increasing cash values, then the accrued benefit method makes sense by converting the cash value into its actuarial equivalent monthly benefit each year. Accrued to date would be divided by yrs of participation to get your EBAR. I'm not sure about the MVAR, because I haven't thought about it. I guess it would depend whether your plan allows a lump sum distribution.

I worry about the abusive and unpredictable issues of policies with shortened premium payment periods. Some of the front-loaded 412i plans have built the cash value in 3 to 5 years, well in advance of their normal accrual. These plans would probably fail the general testing method you described.

I also worry about the valuation of the cash values. If high first year charges get in the way of policy accumulation, then you get bad accumulation of accrued benefits for general testing, as, for example, a premium of $5,000 with a surrender value of zero and a cash value of $1,000 after initial commissions and expenses.