DOL Advisory Opinion 2006-03A

[Jim Norman]

DOL Opines that the purchase of a policy from the plan by the participant for its cash surrender value meets the PTE 92-6 class exemption. Nothing new here. However, DOL goes on to mention recent IRS guidance regarding the fair market value of such policies in Rev Proc 2005-25, and that if the 2005-25 FMV is greater than the CSV, such amount is a taxable distribution. DOL then goes on to say:

"This amendment to the IRS regulations provides for different tax consequences than those described in the preamble to PTE 77-8,(7) the predecessor of PTE 92-6. In this regard, it is the view of the Department that this amendment to the IRS regulations does not affect the relief described in PTE 92-6, or any of the conditions contained therein."

What does this mean? If the IRS changes do not affect "any of the conditions" in PTE 92-6, does that mean that to comply with the class exemption the policy transfer must be done at CSV? And if the 2005-25 FMV is greater the participant is stuck with a taxable distribution? If so, then such could only be done when the participant is due a distribution under the plan. So, for example a DB plan could not do this as in-service distribution are not permissible unless the participant was at NRD or otherwise eligible for a current distribution. If so, this is going to make it a lot more difficult to unwind 412(i) plans, as the only choice would apparently be to surrender the policy.

[JAY21]

I haven't read the DOL cite you mention. However, I take your comments to mean that the DOL opinion is dealing primary with the PTE exemption issue and the IRS standard is more of a taxation issue. Would valuing and distrubuting the policy using the IRS safe-harbor approach (if higher) satisfy both agencies ? Or do you intepret the DOL opinion to "require" it be distributed at CSV for it to satisfy the PTE exemption ?

[Jim Norman]

Would valuing and distrubuting the policy using the IRS safe-harbor approach (if higher) satisfy both agencies ? Or do you intepret the DOL opinion to "require" it be distributed at CSV for it to satisfy the PTE exemption ?

Good point. I'm right in the middle of one of these and was concerned following the IRS valuation might blow the PTE. Reading from the opinion, it says:

'PTE 92-6 requires that “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had it retained the contract, surrendered it and made any distribution owing to the participant of his vested interest under the plan.”'

I think the phrase "at least equal" pretty clearly implies it could be more and still comply with the exemption. I wonder how the IRS would look at a situation where their FMV is less than the CSV? An employee after-tax contribution to the plan? We're waiting on the insurance co to provide the numbers right now (another long story), hopefully I won't have to go there.

[Belgarath]

Here's a link.

http://www.dol.gov/ebsa/regs/aos/ao2006-03a.html

I agree that purchasing it for the FMV if greater than the CSV is fine.

Hard for me to understand how a FMV could be LESS than the CSV.