Insurance in DB Plan

[Dougsbpc]

We administer a two participant DB covering husband and wife.

Last year their insurance agent purchased a $500K policy for one of the paticipants in the plan. It is less than 100x projected benefit so we think that is ok.

The premium is being paid from plan assets and not from the company.

Question: Our understanding is that insurance usually must be purchased for each participant of the plan. However, they are both HCE's so perhaps only one is OK?

With the few DB plans that we have that contain insurance, we usually use the envelope method that adds the premium to the normal cost and it just becomes part of the employer contribution. In this case, since premiums are being paid from plan assets, we are inclined to just treat it like any other investment of the plan (i.e. reflect CV on the balance sheet and a withdrawal for the premium on the income statement and run the valuation as usual). Does anyone see a problem with this?

Also, this client is considering being a sole proprietor next year. Our understanding is that at least a portion of the premium is not deductible to sole proprietors. However, they are paying the premium from the plan and indirectly this affects the contribution.

Has anyone experienced these issues?

Thank much.

[Effen]

I would add a "term cost" to the normal cost. This should be the cost of the insurance, like a term charge. It is the portion of the premium that is actually used to cover the death benefit for the current year. Kind of like an expense assumption.

Ultimately the premiums are always "paid" from the trust. If the company pays them directly, the premium payments is treated as a contribution. So it's like they deposited it into the trust and then paid the premium on the same day. Net effect is 0 to the Trust.

[JAY21]

Ancillary benefits like life insurance are benefits subject to discrimination testing under 401(a)(4) as specified under the benefits, rights, and features of Treas. Reg. 1.401(a)(4)-4. Since there are no non-highlys to discriminate against I don't see any problem if just one owner (HCE) has a policy. Of course if you add a non-HCE employee in the future they would need the same insurance benefit coverage.

I agree with Effen on using the term cost plus normal cost and the fact the premium paid from the trust is no different that paying the premiums directly from the employer to insurance company (as a contribution).

Whether you use envelope funding vs. slit-funding doesn't have anything to do with whether the trust pays the premium or not. I believe that's a funding method choice and often seems to tie to whether you're using whole life policies (usually split funded) vs. term or universal life policies (more often associated with envelope funding given the cash value (if any) at retirement isn't guaranteed).