412i plan exceeding max 415 lump sum

[Guest sueczer]

I'm just wondering what everyone is doing with these 412i plans in which the value of the contract is exceeding the 415 maximum lump sum payable. We are looking at the plans on an annual basis to ensure that the value of the contract won't exceed 415. If it appears that it will, we are advising the client to reduce their monthly benefit or considering termination of the plan prior to meeting the maximum lump sum.

Any other thoughts?

[Effen]

Really? These things may have a 415 problems? Who would a thunk it? I'm glad you waited until the commission was collected before you bothered to look into that possibility. Heck, they might not have thought it was such a good deal if they knew all the details.

Hey Ned, what do you suggest?

Sorry, I counldn't resist, actually sueczer, it's good that you looked at it before it became too much of a problem. It's nice to know that at least one person involved with 412(i)s recognizes the problem.

[Ron Snyder]

The sales model being used in years past was to fund in excess of the 415 limit, terminate the plan after 5 years and pretend that the value of the insurance policy distributed was its current surrender value (even though the policy would increase 4 fold within 5 years).

Such approach is the reason that IRS today is attempting to audit 100% of 412(i) plans.

The problem is the same as for any overfunded defined benefit plan, and I have had to deal with several of those over the years. The choices are:

1. Make some really bad investments to eat up the overfunding. Life insurance is usually pretty bad, especially if you replace the current policy with a new whole life policy for example. If your client is a physician, you could convert the plan to a regular DB plan and let the client choose his own investments: that will use up the overfunding.

2. Other expensive incidental benefits could be purchased as well, including long-term care and disability insurance.

3. Reorganize the sponsoring corporation so that you have an empty sponsoring corporation (except for the plan) and sell the sponsoring corporation to a corporation with an underfunded DB plan so they can merge the plans together. If structured properly, your client should obtain about 70% of the overfunding for a price as a capital gain as well as avoiding the 90% combined taxes applicable to a reversion.

4. Do a reversion.

[Guest Ned Ryerson]

You called?

I am a specialist at reversion avoidance. I have a program to help clients remove themselves from overfunded plan situations. Of course this process is complicated, time-consuming and my advice ain't cheap. However, when it's all said and done, clients have a plan that is nowhere near overfunded. I simply require a prepayment of plan assets for my services.

On three, 1....., 2....., 3..... GO INSURANCE!

[AndyH]

A few days ago I heard a radio commercial from a national host that was pushing the purchase of gold coins as a solution to overfunded DB plans. It was caviated with "I'm told that the purchase of gold coins is a solution to overfunded pension plan problems......."

I've yet to figure that one out but ....... what's the game "Whack a mole"? Convert an overfunded 412(i) into a db plan fully invested in gold coins? And, then what, wait for deflation?

Gold coins-New 412(i)?????

Ned, are u licensed for that?

[Belgarath]

Gosh Andy, it's way better than that. You buy gold coins, then store them in your vault at work. Then you take them, open up a secret Swiss Bank Safe Deposit Box and deposit them all there. THEN you go back home and report the assets (coins) as being STOLEN from your office.

Or, you could buy shares in Red Sox pitching - an investment guaranteed to lose. Of course, you might have a hard time proving fiduciary prudence.

On a slightly more serious note - in a overfunded DB plan, can't they take an annual payment instead of a lump sum? Does this help the situation, or exacerbate it further?

[AndyH]

I suppose that purchasing tickets (in the spring) to the annually planned Yankee Elimination Party and then trying to unload them in August could improve the overfunded status.

The answer to your question is all a function of Ned's annuity pricing. But, yes, a J&100 with a young spouse could solve a 415 problem in some cases.

[Belgarath]

I don't know, I think a young spouse could solve ALL of your problems. Or at least make you forget them.

Now, excuse my ignorance, but if we take the more realistic assumption that the spouses are somewhat similar in age. If they start taking an annual payment, can they later increase it as 415 limits rise, or are they locked into it once they start? And if they can increase it, can they tkae the "balance" of the increased lump sum minus previous annuity payments, all adjusted through your actuarial wizardry, or must they just continue to receive higher annuity payments?

[AndyH]

My understanding is that in a bona fide plan with a bona fide COLA provision the payment could be increased for 415 indexing but in reality these (small) plans are going to be terminated, not maintained indefinitely, so an annuity purchase would be the only option at some point. I don't know if 415 indexing could be done after an annuity has been purchased through some type of annuity "feature" but if so that would be the way to go.