Life Insurance BRF Issue

[mwyatt]

Looking over an existing plan right now and have discovered the following:

Plan uses whole life contracts on the 4 participants in the Plan.

Appears that whoever set the plan up was relying on the 50% rule under 74-307 to determine the face amount of insurance purchased, rather than a definite multiple of the projected benefit. Plan document is not specific as to amount of insurance to be purchased.

Fact pattern is the one HCE has a policy of around 130x projected benefit; one NHCE two years older has policy of around 15x projected benefit; two younger NHCEs have face values of around 25-30x projected benefit.

Appears from my reading that although 74-307 is "satisfied", that there are issues with Benefits, Rights, and Features due to the disparity in face purchased. Any comments?

[rcline46]

My impression is that the same 'formula' needed to be used to purchase the insurance. Some considerations you may have no knowledge about:

Was only 1 policy each purchased and what were the deposits then?

Could they have been purchased at the larger of 50% or 100X back then and not updated?

Could there have been a high increment set in the plan? EG increments of 100,000 with a death benefit of PVAB plus face less CSV?

There are some interesting permutations that might make it fly.

[AndyH]

Mike, the next time I see uniform insurance levels will be the first. It is definitely a BRF issue, but one that is often associated with noncompliance.

[AndyH]

Maybe non compliance with uniformity in insurance levels is another reason why a 412(i) is they way to go.

[Ron Snyder]

I believe that this is not a BRF issue, but a plan qualification issue. Failure to operate the plan in a manner consistent with the plan documents is a disqualifying event. Any of the death benefit purchase rules can be followed, but the plan document needs to be clear and the plan needs to be operated as required under the plan.

[AndyH]

Agreed.