Value of Life Ins. for S412/404 assets

[flosfur]

I have been using accumulated value of life insurnace policies for S412/404 calculation. I have come across cases where actuaries have used accumulated or cash surrender values.

A plan with life insurance is under audit and the IRS is saying that the value of the insurance contracts should be determined in accordance with Rev. Proc. 2005-25, which outlines the methods for valuing the insurance contracts that are transferred to a partcipant etc.

Is there any guidance on determining the value of life insurance contracts for S412/404 calculations?

Thanks for your help.

[zimbo]

I think that the Revenue Ruling from 2005 is supposed to be used to determine market value of life insurance and that probably includes for minimum funding and maximum deductible limits as well.

Admittedly, I believe that most administrators and actuaries have continued to use cash value or cash surrender value in their valuations, but if you check the ruling you will see that determining market value is far more complicated than that.

[flosfur]

I think that the Revenue Ruling from 2005 is supposed to be used to determine market value of life insurance and that probably includes for minimum funding and maximum deductible limits as well.

.....

The Rev. Proc. 2005-25 clearly states:.... for purposes of applying the sections 79, 83 and 402.... There is no mention of 412 or 404!

There are many other examples of code, rulings etc which apply for one purpose but not for other. The example that comes to mind immediately is the attribution rule for ownership - there are so many different sections with different rules and, obviously, they cannot be cross-inferenced.

.......

Admittedly, I believe that most administrators and actuaries have continued to use cash value or cash surrender value in their valuations, but if you check the ruling you will see that determining market value is far more complicated than that.

I know it is far more complicated than "that" but that's not the problem or the question here. The question is, is there a guidance on this for S412/404 calcs?

[AndyH]

Good question. I'm not aware of any, but would be interested if there were. Has the IRS reviewer been asked for a cite (applicable to 412/404)? That is what I would do.

[Guest merlin]

My understanding is that the accumulated value rules are for taxation purposes only. If the accumulated value was 100,000 and the csv was -0-, and you funded based on the 100,000, wouldn't you be using a phantom asset?

[tymesup]

We've been using CSV for our valuations. Since we assume no turnover and no mortality, I think the accumulated value would be more appropriate.

If we were using explicitly reasonable assumptions, we'd have to obtain all the surrender values and add up the PVs at the various decrement ages. I don't have any clients that want to pay for this calculation.

[zimbo]

In reviewing this Revenue Procedure I see that it is explicit in defining what it pertains to and clearly it does NOT mention 412 or 404. It does use the term "Fair Market Value" and it was that term that I was recalling without rechecking the references. Thanks for researching that. I guess I'm lucky I continued to use straight CVs.

We also generally use the full cash accumulation value, rather than the cash surrender value in our valuations. I guess if one wanted to factor in the surrender probability in some acceptable fashion, one could possibly use the guidance in the 2005 revenue procedure where an average surrender rate over the next 10 years is factored in. But I would rather choose not to go there.

[flosfur]

In reviewing this Revenue Procedure I see that it is explicit in defining what it pertains to and clearly it does NOT mention 412 or 404. It does use the term "Fair Market Value" and it was that term that I was recalling without rechecking the references. Thanks for researching that. I guess I'm lucky I continued to use straight CVs.

We also generally use the full cash accumulation value, rather than the cash surrender value in our valuations. I guess if one wanted to factor in the surrender probability in some acceptable fashion, one could possibly use the guidance in the 2005 revenue procedure where an average surrender rate over the next 10 years is factored in. But I would rather choose not to go there.

When the IRS wants a tax payer to do something it is, should I say, always because it is deterimental to the tax payer. The Rev Proc 2005-25 obviously came about because the cash surrender value (CSV) or the accumulated cash value (ACV) were, in their opinion, understating the true worth of the policies.

So if the Rev Proc 2005-25 were to apply for S412/404, it would produce higher value of plan assets and hence lower contribution & deduction which the IRS' objective.

On audit one might find oneself having to defend the use of CSV or ACV vis-a-vis the value determined per Rev. Proc. 2005-25! What is the defense, especially for the sprining cash value type policies!? That's what I am looking for - some solid objective defense.

[Guest wahoo_tiger]

Using AV will probably overstate value, causing potential DOL issue of taxing too much value. Check to see if PERC value applies here. The insurance company can provide this calculation. This value was introduced as a safe harbor but not sure whether this applies to 412 plan. You might have to resort to getting policy valued and then argue with IRS on "willing buyer, willing seller" value they introduced to the discussion. Having done this a few times, that value will probably come up between the surrender value and the account value depending on insured's age and health.