Terminating a fully funded DB plan, and

[katieinny]

A fully funded DB plan was supposedly terminated last year, but nothing was filed with the PBGC (Form 500). I was told that fully funded plans don't need to file with the PBGC. I've since learned that that's not the case. The filing of Form 500 is required. Since the assets have not been distributed, the plan will be frozen and terminated properly at a later date.

The owner would like to get his life insurance policy out of the plan, but he wants to keep the coverage. I've heard that he can simply swap the policy for it's cash value. That way the policy comes out of the plan and there is no taxable event. Is it really that simple?

[Andy the Actuary]

The Plan document should allow for this transaction for anyone with L.I. Also, presumably we are not talking about L.I. that does feature springing cash values (i.e., cash values that increase dramatically in the near future), which the IRS hasn't taken too kindly to.

[katieinny]

Sounds reasonable. We'll check the plan language and amend if necessary to permit such a transaction. And we need to make sure the policy doesn't have a springing cash value. Thanks for your help.

[tymesup]

Since the plan has to go to the PBGC, it sounds like there are other employees besides the owner. They have insurance, also? The option to swap the policies has been offered to them?

[katieinny]

I've been told that the owner is the only person with an insurance policy. The other participants are all funded by annuities.

[tymesup]

I've been told that the owner is the only person with an insurance policy. The other participants are all funded by annuities.

The plan may have a discrimination issue here. This ought to be considered before A) filing for a favorable determination letter or B) risking a plan audit. There may not be much that can be done, now.

On the plus side, the insurance agent got some commissions when the policy was sold.

[AndyH]

The cash value is not necessarily the "swap price". There is a revenue ruling from a few years ago that you would need to reference. A Google search would locate it. Or, better still, ask the insurance company what the appropriate amount would be in such as sale. Or put it on the agent. I believe the appropriate figure would be internal and you would need to get it from the insurer.

And, yes, you definitely have a discrimination problem. I would surrender the insurance pronto before any filing.

[jkdoll2]

The cash value is not necessarily the "swap price". There is a revenue ruling from a few years ago that you would need to reference. A Google search would locate it. Or, better still, ask the insurance company what the appropriate amount would be in such as sale. Or put it on the agent. I believe the appropriate figure would be internal and you would need to get it from the insurer.

And, yes, you definitely have a discrimination problem. I would surrender the insurance pronto before any filing.

The net cash surrender amount goes back into the plan - from outside funds

The owner will get full value of the policy

But he will be taxed on the difference between the PERC amount and the cash surrender amount, no penalties

PERC stands for a valaution formula that takes into account the premiums paid. Earnings from the cash and the contract and reasonable charges for mortality and policy expenses.

You will need to get this amount from the insurance company as well as the net cash surrender amount .

[Jim Norman]

Yes, IIRC to establish the FMV of the policy per Rev Proc 2005-25 you need the PERC amount and the applicable Average Surrender Factor.