Market Value Equalizer Payments

[Randy Watson]

In PLR 200404050, the IRS concluded that "market value equalizer payments" (which are essentially payments to a plan by an insurer to make up for a surrender fee paid to a prior insurer) were not considered plan contributions for purposes of Sections 404, 401(k), 4979, etc....

Could someone familiar with these kinds of insurance arrangements comment on why this would not be a prohibited transaction (i.e., a loan between the plan and a party in interest)? Thanks.

[QDROphile]

Tell us who is the borrower and who is the lender.

It looks more like a bribe to me.

[Randy Watson]

Tell us who is the borrower and who is the lender.

It looks more like a bribe to me.

The new insurer who fronted the surrender fee would be the lender and the plan would be the borrower.

[QDROphile]

Nothing in your post indicates repayment. Or is repayment diguised by an artificial low rate of return?

[Randy Watson]

Nothing in your post indicates repayment. Or is repayment diguised by an artificial low rate of return?

The new insurer recovers the amount it advanced to the plan through amortization charges over a few years. It would also recover the amounts through a discontinuance fee if the plan moves out of the investment within that same period.

From what I understand this is fairly common practice for some of the big insurance companies.

[QDROphile]

Ask the proponent of the arrangement for explanation and justification.

If the participants direct investments and the fund is an option, is does the disclosure warn that new money is helping to pay for a prior charge to the fund by suffering its share the amortization charges? If it is a wasting fund, how does the fund account for some people getting out earlier than others and not bearing their share of the amortization? How does the fiduciary justify the arrangement if there is any mismatch (time or amount) between the orginal investors (who got the benefit of postponement of the value adjustment hit) and those who bear the cost of amortization?

When we were presented with this option recently, we nixed it. It is problematic all around, even it it can pass technical muster. I would love to see a decent comprehensive analysis that concludes that the arrangement is appropriate.

[Bird]

I'm familiar with the arrangement and think you have an interesting viewpoint. If the insurance company is depositing money (more than it received from the prior investment company), and it's not a contribution, then what is it? It certainly is effectively a loan, whether it quite makes it to the point of being a direct or indirect loan and therefore a PT I'm not sure.

But after I saw the first one of these many years ago, I couldn't help but be amused at how they are sold as doing the participants a big favor by eating the surrender charge. Yeah, right, they just pay for it over time (and then some, maybe) instead of all at once.