Exclude Insurance on Schedule I?

[Dougsbpc]

We recently took over a small DB plan (10 participants) that happens to have life insurance. The plan is not exclusively funded with life insurance. In fact total cash value represents about 15% of plan assets.

We noticed that the prior administrator (who sells a lot of insurance) did not include cash value of the policies on the schedule I for all past years.

Is there an exception to reporting the cash value of life insurance on the schedule I? I would think it must be part of plan assets like any other investment.

[Bird]

I've seen it before and agree with you (that it's wrong to not include the insurance as you would any other asset). I assume they have treated premiums as expenses, and that's just...wrong.

[jkdoll2]

We recently took over a small DB plan (10 participants) that happens to have life insurance. The plan is not exclusively funded with life insurance. In fact total cash value represents about 15% of plan assets.

We noticed that the prior administrator (who sells a lot of insurance) did not include cash value of the policies on the schedule I for all past years.

Is there an exception to reporting the cash value of life insurance on the schedule I? I would think it must be part of plan assets like any other investment.

It depends on what type of life insurance it is. If it is Variable or Universal life insurance - then it is included in the plan assets. If it is whole life insurance then it is not.

[Bird]

It depends on what type of life insurance it is. If it is Variable or Universal life insurance - then it is included in the plan assets. If it is whole life insurance then it is not.

Is that in the instructions somewhere? What's the rationale for it?

[jkdoll2]

It depends on what type of life insurance it is. If it is Variable or Universal life insurance - then it is included in the plan assets. If it is whole life insurance then it is not.

Is that in the instructions somewhere? What's the rationale for it?

On a whole life insurance policy - the policy payments are fully guaranteed by the insurance company - so they are not included on the 5500.

I attached the same question we had asked our Technical Answer Group (TAG). Also - it is in DOL regulation section 2520.104-44(b)(2).

I hope this helps.

TAG___insurance_on_5500.pdf

[Bird]

I believe that applies to fully insured plans. Note that they are only considered "allocated" if they provide a specified benefit.

[jkdoll2]

I believe that applies to fully insured plans. Note that they are only considered "allocated" if they provide a specified benefit.

Whole life insurance is a specified benefit. The guarantee part is not included on the 5500. Whole life insurance is a guaranteed benefit. The actuary does not include the cash value in the asset balance when determining the contribution for that plan year. Maybe we both just interrupt it differently.

[SheilaD]

I believe that applies to fully insured plans. Note that they are only considered "allocated" if they provide a specified benefit.

Whole life insurance is a specified benefit. The guarantee part is not included on the 5500. Whole life insurance is a guaranteed benefit. The actuary does not include the cash value in the asset balance when determining the contribution for that plan year. Maybe we both just interrupt it differently.

I think what you are discussing is more of a difference in funding method (for Defined Benefit Plans). On most of our DB plans we use "envelope" funding which means that we use the cash value of the insurance policy as part of the plan assets in developing the normal cost. This method can be used with whole life or other type of life insurance policy.

A method that I saw more often around 20 years ago (I forget what it is called) offset the cash required to be funded at retirement by the guaranteed value in the insurance contract at retirement. When using this method you do not use the current cash value as part of the plan assets for calculating the cost it is already being "used" to guarantee a portion of the projected benefit at retirement.

With envelope funding we always report the cash value in the plan assets. I do recall however that there was controversy about whether you needed to report the cash value when using the second method I described.

In any case - with Defined Contribution plans we always report the cash value as part of plan assets.

FWIW

Sheila

[Bird]

Thanks for the clarification Sheila, that's exactly what I was thinking of, but haven't done DBs in so long I couldn't remember the terminology.