Insurance Problem

[Dougsbpc]

Have a 25 participant DB and PSP that was originally set up by an insurance agent. So of course the DB contains life insurance. The policies have been in force only a few years so CSV is low.

This employer would really be better off with a non-safe harbor floor offset plan. Their younger employees understand and appreciate a 10% of pay PS contribution, while 5 senior owner employees would be happy with the additional benefits in the DB. Both plans would easily pass 401(a)(4).

Our dilemma is how to deal with the life insurance as the new proposed design may result in no DB benefits (after the offset) for several participants. Yet these same participants currently have policies of 100 times benefits. They could terminate the plan and start a new DB but that would result in 100% vesting. Since the same employees participate in the PSP, is there any way to somehow transfer the policies to the PSP?

Thanks much.

[mwyatt]

Assumption is that the plans were NOT offset before. So how do the benefits go to zero once you put the offset in? I would think that you would have a grandfather of the accrued benefit immediately prior to the offset. Benefits would be lower, but wouldn't go to zero for participants in the plan prior to the change to floor offset.

[Dougsbpc]

Mwyatt you are correct. I hadnt thought about the grandfathering requirement.

However, suppose a participant currently has a projected benefit of $2,000 and an accrued benefit of $200. If we amend the plan to add the offset, the participants accrued and projected benefit (after the offset) may be $200. The face value of the policy is $200,000 (100x proj benefit currently). Suppose the participant terminates employment 5 years from now and the CSV of the policy exceeds his PVAB. Furthermore, suppose he wishes to take the policy as part of his distribution. Can he then purchase the policy from the plan by writing a check to the plan for the difference between the Cash value and his PVAB?

[david rigby]

What do you want the death benefit to be?

BTW, death benefits, other than the QPSA, are not covered by 411(d)(6).

[Dougsbpc]

So are you saying that because the death benefit is not a 411(d)(6) protected benefit we may be able to reduce the death benefit which thereby reduces the premium and future cash value?

If that were the case then (in my previus example) the death benefit for the participant could be changed to $20,000 ($200 X 100)?

[david rigby]

I believe the regs. under 411(d)(6) are numbered 1.411(d)(4). No explict cite handy.

[mwyatt]

Doug, since the face of the policy as issued was a function of the projected, not the accrued benefit, I wouldn't be worried about cutback issues.

[Kirk Maldonado]

One way of avoiding having to get a check from the participant would be for the plan to take out a loan against the CSV of the policy (thereby reducing its CSV to the desired level) before distributing the policy to the participant.

If the participant purchases any portion of the policy, you need to make sure that the deal satisfies the conditions of the applicable prohibited transaction class exemption.