Fully-insured Plans

[Blinky the 3-eyed Fish]

A calendar year fully-insured plan begins in 2000. The sponsor makes their first annual premium payment in September 2001 and deducts it on their 2000 corporate return. This pattern continues. Then when it comes time to make their premium payment due September 2007, they cannot do so.

My question is when is the plan considered to have lapsed from being a fully-insured plan - 2006 or 2007?

[Belgarath]

If you get a yacht, you'll be a fish out of water.

I would interpret 1.412(i)-1(b)(2)(v) to mean that it would fail to remain a 412(i) plan for 2006. I don't see how you could get to an answer of 2007 based upon this wording.

[Blinky the 3-eyed Fish]

And here is that language from 1.412(i)-1(b)(2)(v):

"Except as provided in the following sentence, all premiums payable for the plan year, and for all prior plan years, under the insurance or annuity contracts must have been paid before lapse. If the lapse has occurred during the plan year, the requirements of this subdivision will be considered to have been met if reinstatement of the insurance policy, under which the individual insurance contracts are issued, occurs during the year of the lapse and before distribution is made or benefits commence to any participant whose benefits are reduced because of the lapse."

Please give me your thoughts as to why you feel so strongly that the premium payable for the plan year in my example means the plan year is 2006.

[Mike Preston]

I'm not stating an opinion, just noting a trend: the IRS will challenge your plan for the first year: 2000 on the fact pattern you have shown. There are some IRS districts that believe the premium must be paid before the end of the year. And they are adept at writing really long letters that say so.

However, assuming you wish to disuade them from such an opinion, how could a failure to provide for the premium applicable to the 2006 year result in the plan being anything other than a non-412(i) plan for the 2006 year?

[Guest GMAT]

I think under the fact pattern the premium is not due until 2007 hence the plan was in compliance for 2006. IRS opinions are not the law, just their opinions which is the reason we have courts.

[Belgarath]

"Except as provided in the following sentence, all premiums payable for the plan year, and for all prior plan years, under the insurance or annuity contracts must have been paid before lapse. If the lapse has occurred during the plan year, the requirements of this subdivision will be considered to have been met if reinstatement of the insurance policy, under which the individual insurance contracts are issued, occurs during the year of the lapse and before distribution is made or benefits commence to any participant whose benefits are reduced because of the lapse."

Obviously the above emphasis is mine. Well, 2006 is the plan year. The benefit is accrued for that plan year, and the level premium to fund that benefit is based upon that plan year - in other words, you have one premium amount due for each plan year - 2000, 2001, 2002, 2003, 2004, 2005, 2006. That's 7 premiums. I'm also assuming that the policy issue date was 12-31-2000, so that only 6 premiums have been paid prior to lapse, since the 2007 premium hasn't been paid. Maybe this is an unwarranted assumption? But running with that assumption...the "plan year" referred to in the first sentence of the reg is 2006. Ordinary life insurance policies lapse long before 9 months after the premium due date. So the premium wasn't paid before the lapse date. The second sentence wouldn't apply, because the lapse didn't occur during the "plan year" - it occurred during the next plan year (2007).

Anyway, that's my thinking. Do you have any reason to believe that the reg should be interpreted otherwise?

[Blinky the 3-eyed Fish]

I agree with that interpretation. Just playing a little devil's advocate.

Fully-insured plans stink. I don't want a yacht anymore.

[Belgarath]

Perhaps "An Octopus's Garden" would be a more appropriate lounging area for one of piscine heritage? Or maybe octopi eat fish, I don't know...so perhaps not such a great idea!

[AndyH]

Thought you looked a bit discolored there Blink. Guess it's just a bit of sunburn from the last regatta.