valuation of Life Insurance Policy

[Guest Nixdad]

The Rev Proc contains a safe harbor for valuing policies distributed or sold by a plan to a participant. The safe habor is determined as the greater of two amounts, each derived from a formula in the Rev Proc. One formula is essentially:

(1) premiums paid + earnings credited - mortality and other charges (or "PERC"); times

(2) the "Average Surrender Factor" for the next 10 years.

The surrender factor for a year is the greater of:

(a) .7; or

(b) the cash surrender value on the first day of the year/the PERC on that day.

Under Client's policy, (b) would be much lower than .7 thereby substantially reducing the amount derived from this formula.

Does anyone know how the IRS came up with the seemingly arbitrary .7?

Since the Rev Proc only provides a safe harbor for determining (rather than establishing) the value of the policy, does anyone know how I could go about getting another valuation that the IRS might accept?

Thanks.

[Guest VEBAPLAN]

I think that VEBA GURU would know.

[Ron Snyder]

This has been an issue for many years, since the IRS and the DOL have never reached a safe harbor agreement. The DOL issued a class exemption (latest issuance: PTE 92-06, most recently amended in 2002. In connection with the procedure, the DOL issued an advisory opinion in 2007

DOL Advisory Opinion.

In none of the IRS and DOL pronouncements on this subject is there agreement on the valuation of the policy to be transferred.

It is possible to follow the IRS rules and for the transaction to be a "prohibited transaction" under ERISA, if the transaction doesn't exactly follow the DOL exemption requirements. While this wasn't your question, it should be your concern.