412i or Not?

[Guest merlin]

Instead of paying premiums directly to the carrier, the sponsor of a 412i plan makes contributions to an investment account held in the name of the plan, from which he then disburses the premium payments. The deposits are made periodically in varying amounts, and then the appropriate premium amount is disbursed when due. The insurance guy who set this up says the account is -o- at the end of the year, so it's OK. I don't see how. Anyone agree?

[SoCalActuary]

I tend to agree with the agent. The trust is a convenient way to manage the cash flow.

The premiums are paid timely.

If the other aspects of 412i are met, including level premium, benefits only from the

policy proceeds, etc., then why the problem with managing a bank account?

[Guest merlin]

I was thinking of the account as something akin to the additional account that would have to be set up to receive contributions necessary to provide the top heavy minimum benefit to the extent that the policy values don't. Sch. B required, reasonable assumptions, etc. But maybe the reasoning doesn't work in the oteher direction. In my instance the policy values are meeting all the benefits, so the plan is funded exclusively through the insurance/annuity contracts, and any residual assets in the investment account are irrelevant. Thanks, SoCal, I feel much better.

[FAPInJax]

The only sticky point would be that this 'account' can not have a balance. A 412i plan has all assets invested at the insurance company. An account in the name of the plan with money in it (from earnings for the sake of argument that are never used) would violate this.

[SoCalActuary]

But 412i plans may require a side-fund amount to pay a top-heavy minimum benefit.

So there is precedent that 412i can have a trust account.

The question arises then - does this now require an actuary to prepare a funding standard account. I say no.

My understanding for 412i is that the plan must provide all its benefits

thru level funded annuity/life contracts with guaranteed values.

I do not recall a requirement that the plan cannot have a trust account.

Frank - is this in the new regulatory items, or do you have another citation?

[Guest mjb]

If the account is held in the name of the plan isn't it required to be held in a trust account because the funds are plan assets under ERISA? Q -Does the trust account become an plan asset which is subject to Sked B even if it is zeroed out at the end of each year?

[FAPInJax]

You are absolutely correct that a 412i plan can have a trust account for top heavy. However, once they do that an actuary is required. The only question has been whether the actuary is required once it becomes apparent that a participant does not have enough money in their life insurance company assets to cover the PV of the top heavy benefit OR not until a payment is actually required to the participant and the life insurance company assets are insufficient.

I do not have a cite other than 412i which says that the plan is funded EXCLUSIVELY by the purchase of individual insurance contracts. IF there is this 'trust' account, does this violate the exclusively clause?? I, personally, would feel uneasy about monies in the account.

[AndyH]

I, personally, would feel uneasy about monies in the account.

I on the other hand would feel more uneasy with the moneys in the 412(i).

On the serious side, it seems to me that the situation described might require the establishment of a Trust that was not contemplated by the fully insured arrangement. This changes the 5500 reporting and requires the appointment of a Trustee among other things, i.e. I don't see how this could be custodial only. Then doesn't the Trustee have fiduciary responsibilities including diversification that might conflict with 99% investment in a 412(i)?

......just some idle rambling

[Guest FLMaster]

Wake up and smell the coffee. The reason 412(i) plans are exempt from the Schedule B requirement is the benefits are guaranteed by an insurance company. Since the benefits are guaranteed we do not have to rely on the actuary guessing whether the plan assets will be there when the participants retire. The actuaries have guessed wrong anyway the last 7 years (filling out a schedule B is a waste of time). The proper procedure is to set up a plan trust account and transfer the funds to the trust and on to the insurance companies. If you want to be a purist- make the trust an NIB account. It doesn't matter the interest is deminimus anyway. To give you a practical example, recently I called the DOL on an account that Key Bank took money from a qualified plan and gave it to an outside party. The DOL told me that if an account is shorted $1500.00 they won't go after the fiduciary as it is too small (I have a recording of this by the DOL if you care to listen to it). So purist get practical. Nothing will happen anyway-with that- I'm going to the beach

[Belgarath]

While I tend to agree with FL that the fiduciary aspects of this are not likely to be a problem, I'd personally be more concerned that the IRS might assert that use of the plan account as described violates 412(i).

The approach given is both reasonable and practical. The same cannot automatically be assumed of the IRS, particularly in a 412(i) context these days. It would be nice to think they they would adopt a "no harm no foul" approach in this situation, but I don't think I'd want to count on it.

[WDIK]

Since the benefits are guaranteed we do not have to rely on the actuary guessing whether the plan assets will be there when the participants retire. The actuaries have guessed wrong anyway the last 7 years

It's a good thing insurance companies don't employ actuaries.

FLMaster, may I join you at the beach?

[mwyatt]

Without starting another thread worthy of Red Adair's help to put out, the issue here seems to be whether having a bank account set up to park premium payments as they come due from the insurance company triggers additional requirements over those outlined under 412(i), such as filing a Schedule B and bringing those onerous actuarial fees into play (as opposed to those benign insurance commisssions).

Do I know the answer to this? No. Do I wonder if the IRS may raise an objection? Yes, I've seen them raise their hackles on more illogical points in the past.

From a practical standpoint, what is gained by having the employer move monies early over to the plan's checking account, rather than just paying the bills directly as they come due?

[AndyH]

What does the Impossible Dream Red Sox shortstop have to do with this subject?

Practicality aside, is a 100% investment in a 412(i) arrangement prudent investing for a Trustee? Does it meet ERISA standards? How about a plan with 100% of money invested in an insurance company GA?

I wonder if one of my first clients, Dr. B____ , who's PS plan consisted 100% of accrued interest on loans plus a 1948 Pontiac may have been more diversified in his portfolio.

[SoCalActuary]

What does the Impossible Dream Red Sox shortstop have to do with this subject?

Practicality aside, is a 100% investment in a 412(i) arrangement prudent investing for a Trustee? Does it meet ERISA standards? How about a plan with 100% of money invested in an insurance company GA?

I wonder if one of my first clients, Dr. B____ , who's PS plan consisted 100% of accrued interest on loans plus a 1948 Pontiac may have been more diversified in his portfolio.

I see you are having fun at the expense of 412i investments. But you did take us off the track of this

posting. By the way, what's the appraisal on the pontiac now?

[AndyH]

Actually, my question was serious. Would a plan participant have a claim against the plan sponsor if the insurance company sponsoring the 412(i) went under?

A bit off track I will admit. My apologies to Harwood.

[Belgarath]

Interesting question. I'd guess it isn't any different than any other fiduciary prudence issue - if the funds were invested in Executive Life the day before it went under, I'd think there might be a valid claim. But if there's evidence of proper, reasonable, and prudent fiduciary due diligence when selecting the insurance carrier, then I'd think the fiduciary should be ok. I wonder, however, how many of these claims get judged purely on hindsight - maybe some of the ERISA attrorneys out there have seen some real cases.

But unless the employer is bankrupt, is it really going to matter? Doesn't the plan still have to provide the benefit, then the employer stands in line with the other creditors to recover as much as possible? I don't know how that works...

[SoCalActuary]

Remember that the insurers are subject to state regulation. If an agent sells a policy for

a failing company, then there is probably a state fraud issue to pursue. Otherwise, the

state can reasonably expect that policies will get paid, even if the insurance stockholders

get nothing.

In other words, I would not waste my time looking for a fiduciary issue on most 412i plans.

[Guest mjb]

It is very difficult to prove imprudence in an selecting insurance co because there is very little disclosure of impending financial failure (Mutual Benefit was a AA company until 2 months before insolvency. By the time policyholders were made aware of its financial problems it was too late to withdraw funds.) There was the horrendus litigation involving Unisys use of Exec life GICs in its 401k plan. After 4 court decisions and $$ millions in lawyer time the final decision was that there was no imprudence in selecting Exec life because the GICs were part of a diversified portfolio. The DOL did issue some guidelines on insuance company selection a few years ago but I dont know if anyone pays attention to them.