Qualified Defined Benefit Plan, not 412(i), but no Trust

[John Feldt ERPA CPC QPA]

We are taking over a DB plan and they claim that they have no trustees (it's true their plan document has no trust provisions). This is not a 412(i) plan. They are a normal for-profit C-Corp. All of their plan assets are invested with an insurance company. They state that because of this, they are not required to have trustees. They say then that they don't want to name a trustee because of the fiduciary liability that would then be placed upon that individual.

Is it possible for a qualified defined benefit plan to not have a trust and thus not have trustees?

Don't they already have fiduciary liability anyway, even if they appear to not have a named trustee?

[AndyH]

The situation you describe is fine. I questioned it multiple times when I first ran across one. The assets must be all held with an insurer. No problemo.

p.s. I think it is prudent to engage an investment advisor to advise the sponsor on the selection of investments within the available arena, if they have an acceptable menu. I am not commenting upon fiduciary issues. The ones I have seen are with top companies, which while still not my choice are better than fly-by-night insurers.

[Ron Snyder]

I doubt that the "situation is fine". Who owns the contracts?

A. The Employer - The employer is the de facto trustee (as well as a named fiduciary), and employer contributions are not tax deductible because they were not paid over to an independent third party. (Yes, the insurance company is an independent third party, but they have not signed documents making them a party to the plan. They are, therefore, only an insurance issuer, and the insurance products are not different from a brokerage account in the name of the employer.

B. The Participant - The participant has constructive receipt of the contribution in the year made, the employer gets a current tax deduction and the entire contribution must be included on the participant's W-2.

C. Someone Else - The someone else is the trustee of an implied common-law trust is such trust is permitted under state law. However, the trust provisions which need to be included in the document are lacking, so IRS could easily disqualify the plan as well as the trust.

Remedy for A: Have the insurance company sign an agreement which designates them as the "custodian" of the plan.

Remedy for B: Have someone else own the contracts.

Remedy for C: Create and execute an appropriate trust/custodial agreement.

[jpod]

It certainly can be fine. See IRC Section 401(f) and ERISA Section 403(b)(1).

[AndyH]

Thanks for the vine and cite jpod.

I'll revoke my description and call it "dandy".

[GBurns]

Is the policy a life insurance policy or is it an annuity or otherwise?

I do not think that a life insurance policy can be treated as a qualified trust.

Who holds the assets and the contract? Isn't that person, by default, the Trustee? I cannot imagine the insurance company allowing themself to be default trustee.

[AndyH]

George, what a pleasant surprise. If you look at the Code 401(f) cite, you see that the reference is to a qualified plan, not a life insurance policy.

[Belgarath]

What does Ned Ryerson think about these plans? At least he can sell annuities in them, even if the life insurance is verboten.

Levity aside, I've never happened to run into one of these. So you still must have a plan document, which would have all the normal IRS/ERISA stuff, eligibility, nondiscrimination testing, etc., etc., but there's no actual Trust. According to the IRC 401(f) citation, it appears that the insurance company acts as Trustee. Is there a specific Prohibited Transaction Exemption for this?

I'm guessing that there must be some downfalls to this, or everyone would do it this way rather than operating plans as we normally see them!

[John Feldt ERPA CPC QPA]

This one is a very old plan. They were investing the plan money in a "deposit account" contract with the insurance company. Last fall the insurance company stated that they were no longer going to offer that type of investment product. The insurance company also provided the plan its GUST plan document, which contains no trust provisions and yes, they cited ERISA Section 403(b)(1) when asked.

The company's attorney said that the Employer cannot be the trustee because state law prohibits a corporation from acting as trustee of a trust.

[AndyH]

Ned's never heard of this, but the Fiduciary Answer Book Chapter 8 (8.58 and 8.59 in my version) provides some discussion, cites, and cross references on this topic.

[John Feldt ERPA CPC QPA]

From the Fiduciary Answer Book, it looks like the insurance company is the fiduciary to that plan asset. Perhaps that is related to their decision to no longer offer that type of investment anymore.

Thanks for the info!

[GBurns]

AndyH

I see mention of contract (which is the same as policy) but do not see "qualified plan" or even "plan". Where did i miss it ?

(f) Certain custodial accounts and contracts

For purposes of this title, a custodial account, an annuity contract, or a contract (other than a life, health or accident, property, casualty, or liability insurance contract) issued by an insurance company qualified to do business in a State shall be treated as a qualified trust under this section if—

(1) the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust under this section, and

(2) in the case of a custodial account the assets thereof are held by a bank (as defined in section 408 (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will hold the assets will be consistent with the requirements of this section.

For purposes of this title, in the case of a custodial account or contract treated as a qualified trust under this section by reason of this subsection, the person holding the assets of such account or holding such contract shall be treated as the trustee thereof.

[AndyH]

But (by?) George, I'm looking at 401(f). Look at the description of Code Section "401"

[John Feldt ERPA CPC QPA]

I suppose I implied that by the title and by placing the initial question in the DB plan message board.

[AndyH]

I know that Mass Mutual sets these up, even now for new plans, for either PS/K plans or DB plans.

[Guest mjb]

IRC 403(a)(1) (Taxation of beneficiary under a qualified annuity plan) provides that the distribution to a beneficiary of an annuity contract purchased by an employer under a plan that meet the requirements of IRC 404(a)(2) will be taxed as distribution under IRC 72. 404(a)(2) contains the same requirements for qualification as a qualified trust other than 401(a)(1) and 401(a)(2).

In other words, an annuity contract that meets the requirements of 404(a)(2) will be treated as qualified plan for deductions, distributions and non taxability of investment income.

[Guest Ned Ryerson]

What does Ned Ryerson think about these plans? At least he can sell annuities in them, even if the life insurance is verboten.

Thanks for waking me up Belgarath! I can sell life insurance to a dead man and this arrangement or any other for that matter won't stop the insurance train, so get on board or get run over! NOW WHO WANTS INSURANCE!!!

Andy, how dare you question my knowledge. I am an INSURANCE SALESMAN after all!

[Belgarath]

This is great! I just happen to know of some dead people who want to purchase life insurance and name me as beneficiary. I've been looking for a good agent like you.

The real question, of course, is will you sell life insurance to anyone who hunts with Dick Cheney?

[david rigby]

I can sell life insurance to a dead man...

Ah, selling it and getting it by your underwriters, are two different things.