Insurance in a DB/DC cross tested arrangement

[Guest saeissler]

Let us say that you have a DB plan with only HCEs that has life insurance providing the death benefit. You have a profit sharing plan with only NHCEs and no life insurance. You meet 401(a)(26) minimum participation rules; and you meet 410(b) and 401(a)(4) with respect to benefits and contributions by testing the plans together and cross testing. But it would appear that you do not meet the benefits/rights and features requirement since the HCEs have life insurance and the NHCEs do not. In the profit sharing plan, would you need to provide the contribution needed to pass 410(b) and 401(a)(4) with respect to testing benefits/contributions PLUS an additional amount to provide equivalent life insurance, since the insurance in the DB plan is in addition to the accrued benefit? Or, because these are different types of plans, could you simply allow participants to invest part of their contribution in life insurance up to an equivalent amount and subject to the DC limits?

[AndyH]

The only thing certain here is that you definitely cannot have such a benefit difference merely because one is a DB and the other a DC.

I think this situation is problematic if it already exists. It might be just the right excuse for an auditor to make an issue of a DB/DC combo.

To correct it, I'd gross up the DC contribution to an amount sufficient to cover hypothetical equivalent premium (and, if greater, face value) levels, and offer the insurance option.

Then when everybody declines I'd cancel the insurance and cross my fingers.

[Guest saeissler]

The only thing certain here is that you definitely cannot have such a benefit difference merely because one is a DB and the other a DC.

I think this situation is problematic if it already exists. It might be just the right excuse for an auditor to make an issue of a DB/DC combo.

To correct it, I'd gross up the DC contribution to an amount sufficient to cover hypothetical equivalent premium (and, if greater, face value) levels, and offer the insurance option.

Then when everybody declines I'd cancel the insurance and cross my fingers.

Thanks - that's my conclusion too. A proposal recently came across my desk with insurance only in the DB plan and I just wanted to make sure I wasn't mssiing something.

[Belgarath]

Hi Andy - I think what you are saying is the same as my feeling on this, but let me regurgitate it and see if you agree?

My non-actuarial thinking always gravitates to DC allocations, so my thinking is this:

You take your DB benefit and convert it (only for purposes of an apples to apples comparison) to a DC percentage allocation. So your present value DB benefit/increase equates to, say, 7% of pay for a given year for a given individual. In addition, his life insurance premium dollar amount equates to another 3% of pay. So in the DC (presumably profit sharing plan) you'd have to contribute 10% for this individual. Is that what you are saying?

I can't see much that's good coming out of this type of plan design, but then again, I root for the Red Sox, so my judgement is questionable.

[AndyH]

Kinda Sorta

I'm suggesting dealing with the insurance last. It is a BRF, not included in the a(4) general test. You need something equivalent to trade off. So, figure out what DC contribution is needed to pass the test, then add on to that contribution an amount sufficient to purchase the same level of insurance as the most expensive HCE.

Then you are about as safe as having Julio Lugo as your shortstop and Mike Timlin as your closer!

[Belgarath]

That bad, eh?

Ok, I think I'm groping toward an understanding. So how do you determine the "level" for the most expensive HC? Wouldn't you have to convert that premium into a percentage benefit? You can't really use face amount if using the 2/3 rule, can you, since the HC will presumably have a much larger premium available.

These are the kinds of plans that seem to appear in promotional pieces with artificially massaged census, compensation, ages, formula, etc., and that would never work properly in the real world.

[AndyH]

I don't think this works in any world, let alone the real world.

[Mike Preston]

LOD and 81-202?

[AndyH]

If there is any applicability to 81-202, it would constitute reason #57 why we need Mike on these boards.

I started in this business in 1982, so 81-202 is too old for me!

BTW, wouldn't it be superceded by a(4)-(BRF section) anyways?

BTW II, the insurance guy who issues the policies on the day the plan is sold won't wait for a determination letter! He's got yacht club fees to pay.

[Mike Preston]

LOL.

I was just saying that if one does not know how to apply -a4 in a specific situation, whether for amounts testing or for BRF testing, the general solution is to put something in place and then submit for an LOD. When putting "something in place" if you want to make some sort of adjustment to benefits in order to help ensure non-discrimination, and if you felt like it, you might use 81-202 as a first attempt and then sit back and wait for the IRS to tell you that it works or doesn't work.

And if you lose your yacht in the process, so be it. <smile>