Changes to Life Insurance policies

[flosfur]

A DB plan’s death benefit is the greater of PVAB or the (insurance) Policy proceeds. The face amount of the insurance policy to fund the death benefit is 100 times the projected benefits.

The plan has been purchasing Whole Life policies. The sponsor now wants to:

1. Prospectively stop buying additional insurance for existing participants resulting from increases in their projected benefits and for future new participants.

2. Somehow reduce the premiums burden on the existing policies of all participants so more money can be invested in non-life insurance investments.

As to 2, is there an anti-cut (or any other) problem if the policies are converted to Term assurance? I don’t see anywhere in the plan document where it is says that the policies have to be Whole Life – it just says life insurance policies.

[AndyH]

No, (regarding #2) not a problem as long as you are consistent regardless of HCE or NHCE. Life insurance is not a protected benefit.

Item 1 could require testing for BRFs under a(4) and would require document alterations.

[flosfur]

No, (regarding #2) not a problem as long as you are consistent regardless of HCE or NHCE.  Life insurance is not a protected benefit.

......

Are you saying the plan can surrender existing policies also without a problem (as long as everyone's policy is surrendered) since life insurance is not a protected benefit?

.............

Item 1 could require testing for BRFs under a(4) and would require document alterations.

Of course the document will be amended. But why and what kind of BRFs test is required? The change will apply to all participants (HCEs and NHCEs).

[AndyH]

Sure, the insurance could be surrendered. It happens all the time.

Re testing, I would think that each insurance level, as a percent of the benefit, would constitute a different benefit that would be tested under 1.401(a)(4)-4. That would be a body count amoung each percentage insurance level. The regulation provides for some aggregation of levels. New people with no insurance would be 0's in each level tested.

[flosfur]

Sure, the insurance could be surrendered.  It happens all the time.

..........

Just because it is done all the time, doesn't make it right? By removing the insurance, have you not reduced the death benefit? Let's say, the death benefit is PVAB. Can one eliminate this and simply provide the mandated default 50% QJSA to married participants!?

...................

Re testing, I would think that each insurance level, as a percent of the benefit, would constitute a different benefit that would be tested under 1.401(a)(4)-4.  That would be a body count amoung each percentage insurance level.  The regulation provides for some aggregation of levels.  New people with no insurance would be 0's in each level tested.

If the test is failed, one is forced to buy insurance for some or all new particiapants!? So one cannot eliminate purchasing policies prospectively?

[JAY21]

Death benefits are "ancillary benefits" not accrued benefits subject to IRC 411(d)(6) protection. I agree they can be eliminated down to the required QPSA (50%) for married participants.

[Belgarath]

This seems a little confusing to me. In no particular order:

Is the death benefit really defined as the larger of the PVAB or the life insurance policies? I only ask because the DB plans that I have seen generally either use the 2/3 rule, or the "stated times" method, where the benefit is the larger of the (in this case) 100 times projected benefit that you mention, or the PVAB. Not the larger of the PVAB or the life insurance. Of course there are variations, and what you mention may well be one of them - I just haven't happened to see this particular one.

As far as surrendering the policies, I agree that this is no problem.

As far as keeping the policies in force in one form or another, so that under the apparent current definition some folks will have a higher death benefit than others, I agree that this is a BRF subject to testing. And I'm frankly dubious that it will pass, or at least not for long. Presumably all the current HC's will receive the higher death benefit, and all the newer NHC's as they are hired will not. If this is a small plan following "normal" hiring and turnover patterns, it is likely to fail as the percentage of NHC's with lower death benefits rises.

What I've generally seen in such a situation is that the plan sponsor amends the plan so that there is NO insured death benefit, then surrenders all the insurance (after first offering all insured participants the option to purchase the policies on their own lives under PTE 92-6.) This seems a lot cleaner to me.

[AndyH]

Good comments. Inspired, no doubt, by Big Papi.

flosfur, yes, you can freeze insurance levels. But you need to test it. And eventually as Belgarath pointed out, the test will likely fail. Not immediately. Maybe not even for several years. But eventually.

[flosfur]

This seems a little confusing to me. In no particular order:

Is the death benefit really defined as the larger of the PVAB or the life insurance policies? I only ask because the DB plans that I have seen generally either use the 2/3 rule, or the "stated times" method, where the benefit is the larger of the (in this case) 100 times projected benefit that you mention, or the PVAB. Not the larger of the PVAB or the life insurance. Of course there are variations, and what you mention may well be one of them - I just haven't happened to see this particular one.

.........................

Yes.

The prototypes and volume submitters from document vendors (Corbel, Datair, AccuDraft...) list many options for death benefits such as: Vested PVAB, PVAB, Policy proceeds, Policy proceeds minus cash value of policy, greater of PVAB and policy procceds, PVAB + Policy proceeds - Cash value and so on.

The x times projected benefit as such is not one of the options, presumably because small plans cannot self insure such a benefit and must buy insurance if they want to offer such a benefit.

[flosfur]

.............

flosfur, yes, you can freeze insurance levels.  But you need to test it.  And eventually as Belgarath pointed out, the test will likely fail.  Not immediately.  Maybe not even for several years.  But eventually.

So it's either all or nothing! Can eliminate life insurance completely but cannot freeze it!? Doesn't make sense to me.

[flosfur]

........

........ after first offering all insured participants the option to purchase the policies on their own lives under PTE 92-6.)....

I have always accepted this at its face value. Is this is a requirement? If it is, I don't understand since if the death benefit and hence life insurance is not a protected benefit why is one required to offer this option?

[Belgarath]

Flosfur - I'm not aware that there's a qualification requirement to offer the policies for sale to the participants. It may be that LRM language does this, but I don't know. I do know that every plan I've ever seen that allows insurance has this provision, but again, I don't know if it is required - I'm inclined to think not, but I haven't done any research on the question.

Even if not required, I can't imagine why a plan with life insurance wouldn't allow it - there's no detriment to the plan other than some small amount of administrative work in selling as opposed to a simple surrender. If you had a participant who was uninsurable, or terminally ill, etc., and the plan didn't offer this option, I would think that beneficiary lawsuits might ensue. (Whether they would be successful I have no clue, but who wants to get sued if easily preventable.)

[flosfur]

Death benefits are "ancillary benefits" not accrued benefits subject to IRC 411(d)(6) protection.  I agree they can be eliminated down to the required QPSA (50%) for married participants.

I don't see death benefit listed in 1.411(d)-4(d) Q&A-1(d) "Benefits that not section 411(d)(6) protected benefits"!

It lists "ancillary life insurance protection" which is not the same as death benefit. Death benefit of PVAB is directly linked to actual accrued benefit.

[Belgarath]

You might want to take a peek at the new final regs on 411(d)(6) protected benefits. I haven't read them yet myself, and have only skimmed the first 7 pages of the "explanation" but it seems to me that I saw something indicating that a death benefit in a DB plan (but not a DC) could be eliminated.

If true, seems kind of rotten, but I have to read it before I can form an opinion!

[himt4]

QUOTE (Belgarath @ Aug 17 2005, 07:23 AM)

This seems a little confusing to me. In no particular order:

Is the death benefit really defined as the larger of the PVAB or the life insurance policies? I only ask because the DB plans that I have seen generally either use the 2/3 rule, or the "stated times" method, where the benefit is the larger of the (in this case) 100 times projected benefit that you mention, or the PVAB. Not the larger of the PVAB or the life insurance. Of course there are variations, and what you mention may well be one of them - I just haven't happened to see this particular one.

.........................

The documents we deal with split the issue of the death benefit and Insurance amount: There will be one set of options dealing with what the death benefit is, i.e "greater of Insurance Proceeds or PVAB" or "PVAB + Insurance Proceeds -Cash value of Insurance"

Afterwards, there will be options of how much Insurance should be bought, i.e "100 time projected benefit" or "amount that can be bought with premiums equal to 2/3 of theoretical contribuion"

[flosfur]

You might want to take a peek at the new final regs on 411(d)(6) protected benefits. I haven't read them yet myself, and have only skimmed the first 7 pages of the "explanation" but it seems to me that I saw something indicating that a death benefit in a DB plan (but not a DC) could be eliminated.

If true, seems kind of rotten, but I have to read it before I can form an opinion!

How new are the regulations to which you are referring to?

The ones I looked at were taken from BNA's website service (my service provider) earlier today - which are current at least up to last two weeks!

Also, if you have not read them, why even bother to refer to them?

I wish people (on this board) would take time to research before opining and have some definitive cites to back up their opinion(s) other than I have seen/heard it done this or that way. To which I always respond by saying: I see people driving at 85 miles an hour but that doesn't mean driving at 85 mph is legal in USA (notwithstanding it is not a problem on autobahns of Germany).

I know this is a free website but, please, we are not just shooting the breeze on this Board or are we? Well at least I am not!

(not meant for you Belgarath): To be sure, sarcastic respsonses may amuse the writer and provide chuckles to the all knowing but they neither answer the question(s) posted nor help other readers in their research if they are searching this site for "legally correct" answers.

[Belgarath]

Sorry if my lack of specificity offended you or wasted your time.

To be precise, here's what I remember (from page 7 of) the skim I referenced:

"For a defined benefit plan, these regulations provide that a death benefit that is not part of an optional form of benefit is an ancillary benefit and, therefore, is not a protected benefit under section 411(d)(6), even if paid after retirement. The regulations also clarify when a death benefit under a defined benefit plan is part of an optional form of benefit. The definition of optional form of benefit is defined in 1.411(d)-3(g)(6)(ii) of these final regulations and in 1.411(d)-4, Q&A-1(b)(1), which has been revised by this Treasury Decision to coordinate with the definition of optional form of benefits in these final regulations."

[AndyH]

flosfur, your comments are way out of line, IMHO.

How often do you say thank you when somebody takes the time to help you with your question?

And you have the gall to take issue with someone pointing out that there is new information pertinent to your question?