purchasing insurance policy FROM the plan

[himt4]

I am aware that one of the prohibited transaction exemptions is that if a DB Plan has insurance policies, that when the plan would otherwise surrender the policy, that it could instead sell the policy to the Participant.

PTE 92-06 says that the price of such a sale would be at least the "amount necessary to put the plan in the same cash position as it would have been in if it had...surrendered it"

So, when a participant terminates employment in a DB plan with insurance, I will inform the client that any policies held for that participant are to be surrendered and the proceeds should be deposited with Plan Assets. However I tell the client that before they surrender the polices they should first see if the participant wants to buy the policy from the Plan, and the price would be the Cash Surrender Value.

I was recently told by someone that new guidance says that the Cash Surrender Value is no longer what the participant would have to pay to buy the policy. That the price is now some formula or whatnot. Can anyone explain or cite me this new guidance.

[Belgarath]

Believe it or not, I just had to look at this this morning. So here's my take, briefly:

You have two separate issues - the DOL PT issue, and the IRS guidance on Fair Market Value (FMV)

For purposes of the DOL, selling it for the CSV is still acceptable. This will satisfy the DOL's PT requirements, assuming of course that it also satisfies the other requirements of that PTE.

HOWEVER...

for other qualification and taxation purposes, you need to look at the IRS guidance. This includes Revenue Rulings 2004-20, 2004-21, Rev. Proc. 2004-16, Rev. Proc. 2005-25, and final regulations under 402(a). Without getting into a dissertation, the policy must generally be purchased for FMV. The FMV MAY be the same as the CSV, but often isn't. If it is higher, then you must use FMV. Otherwise, you can run into all kinds of problems, including possible plan disqualification, improper tax reporting, etc...

Have fun.

[himt4]

Thanks for the information. Things seem to be a lot more complicated now. For the viewers out there I provide an excerpt from Rev. Proc. 2005-25. Instead of the Fair Market Value being the Cash Surrender value, its now something like this as described in Rev. Proc. 2005-25

greater of: A) the sum of the interpolated terminal reserve and any unearned premiums plus a pro rata portion of a reasonable estimate of dividends expected to be paid for that policy year based on company experience, and B) the product of the PERC amount (the amount described in the following sentence based on premiums, earnings, and reasonable charges) and the applicable Average Surrender Factor described in section 3.04 of this revenue procedure.

[AndyH]

Good grief. Briefly qoting GBurns, "Who or what determines" these amounts? Joe the small business owner?

[himt4]

well, in the old days I would tell the client to request from the insurance the amount of the Death Benefit, the Annual Premium and the Cash Surrender value, and then give that information to the terminated participant so that terminated participant can make a decision.

So now I will tell the client to request from the insurance the amount of the Death Benefit, the Annual Premium, the Cash Surrender value, and the Fair Market Value under revenue procedure 2005-25, and then give that information to the terminated participant so that terminated participant can make a decision.

[GBurns]

AndyH

I hope that it was only the eggnog kicking in so early. ????

[AndyH]

Don't you feel famous being quoted?

[GBurns]

It helps, but it is such a change. Can you imagine how I would feel if JanetM also quoted me???????