Life insuranc in DB plan

[jkdoll2]

Relevant Background Information

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One owner plan - DB Plan with insurance (Incentive Life. He is 67 yrs old and terminated the plan. He wants to buy the policy outside of the plan and change the ownership from the plan to himself. I received the Policy values (PERC values). There seems to be a discrepency between the IRS and DOL on what to pay to the plan to buy the policy outside of the plan.

Specific Question

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The DOL says to use the cash surrender amount to pay to the plan and get a 1099 for the difference between the cash surrender amount and the perc amount. The IRS says the PERC amount is the amount owed to the plan.

Which one is correct?

Cash Surrender amount is $25,864.74 and the PERC amount is $68,313.00

[Belgarath]

"The DOL says to use the cash surrender amount to pay to the plan and get a 1099 for the difference between the cash surrender amount and the perc amount."

Can you provide a citation of where the DOL states this? Thanks.

[Guest VEBAPLAN]

Your client should sue the agent for selling him the policy. Almost sounds like a springing cash value policy, listed transaction, and a bad investment.

[jkdoll2]

Your client should sue the agent for selling him the policy. Almost sounds like a springing cash value policy, listed transaction, and a bad investment.

That really didnt help me with my question. I just want to know what value you use for purchase outside of the plan - PERC amount or cash surrender amount. This is a insentive life policy - he only put in 25% of the Defined Benefit Contribution to the life insurance.

I cant find where the DOL states how they determine Fair Market Value and tax the rest. I was just asking for my boss who is a life insurance agent and says he always heres conflicting answers. I appreciate it if I can just get comments on the issue.

Thanks

[david rigby]

I cant find where the DOL states how they determine Fair Market Value and tax the rest.

Does the DOL determine tax value?

[jkdoll2]

I cant find where the DOL states how they determine Fair Market Value and tax the rest.

Does the DOL determine tax value?

I guess not - so would you use the PERC amount to purchase the policy outside of the plan? That seems to be the way everyone is leaning towards. Thanks

[Belgarath]

Ok - just wanted to make sure there wasn't some additional guidance out there.

For purposes of the DOL and satisfying Prohibited Transaction Exemption 92-6, the purchase price that the plan receives must only be at least equal to the amount necessary to put the plan in the same cash position. That is, cash surrender value. See DOL Advisory Opinion 2006-03A.

However, for plan qualification/taxation purposes, the Fair Market Value must be used, as per Revenue Procedure 2005-25, and the final regulations under 1.402(a).

So in your situation, if the participant doesn't mind taxation, he could buy the policy from the plan for the $25,000+ surrender value, and would be taxed on the difference between the $68,000+ fair market value and the $25,000+ surrender value.

[jkdoll2]

Ok - just wanted to make sure there wasn't some additional guidance out there.

For purposes of the DOL and satisfying Prohibited Transaction Exemption 92-6, the purchase price that the plan receives must only be at least equal to the amount necessary to put the plan in the same cash position. That is, cash surrender value. See DOL Advisory Opinion 2006-03A.

However, for plan qualification/taxation purposes, the Fair Market Value must be used, as per Revenue Procedure 2005-25, and the final regulations under 1.402(a).

So in your situation, if the participant doesn't mind taxation, he could buy the policy from the plan for the $25,000+ surrender value, and would be taxed on the difference between the $68,000+ fair market value and the $25,000+ surrender value.

Thank you - that is exactly what I needed. I appreciate it.

[Belgarath]

You're welcome. But be aware that the excess amount is also included for qualification purposes, so theoretically, this could cause a 415 problem if you are otherwise at the 415 limit without taking into account the difference between the CSV and FMV. Just to use ridiculous numbers by way of illustration, say your 415 lump sum limit is $150,000. You have $125,000 in regular assets, and $25,000 for the life insurance CSV. So if the policy is purchased for $25,000, (which satisfies the DOL) but the FMV is $70,000, then you have a distribution of $45,000, which means you can only distribute $105,000 from your other assets.

And this problem doesn't go away if he purchases it for FMV, because you then have more funds in the plan, ($195,000) but you still have the same 415 limit.

[jkdoll2]

You're welcome. But be aware that the excess amount is also included for qualification purposes, so theoretically, this could cause a 415 problem if you are otherwise at the 415 limit without taking into account the difference between the CSV and FMV. Just to use ridiculous numbers by way of illustration, say your 415 lump sum limit is $150,000. You have $125,000 in regular assets, and $25,000 for the life insurance CSV. So if the policy is purchased for $25,000, (which satisfies the DOL) but the FMV is $70,000, then you have a distribution of $45,000, which means you can only distribute $105,000 from your other assets.

And this problem doesn't go away if he purchases it for FMV, because you then have more funds in the plan, ($195,000) but you still have the same 415 limit.

It shouldnt be a problem he was not totally funded and he had a shortfall in 2008. He is not near his 415 limit. But - thanks for pointing that out it is good to know.

[Guest VEBAPLAN]

They are being fined by IRS and sued by their former clients.

[Guest VEBAPLAN]

And PERC is only sometimes correct, be careful. I was an expert witness on point and won.

[frizzyguy]

There are a lot of things to make sure you pay attention to with Life Insurance in a plan. I have found that some insurers will give you the PS58 cost to put on the participants 1099. Have you gone that route yet? I could be way off though.

[Guest rex]

i am a physician who unfortunately 1.5 years ago at the age of 39 was suckered into a 412i plan under the idea that maximizing my deductions would provide the greatest economic benefit. When i confronted the agent a few months into the plan how that isnt true but really when u load the plan with 50% whole life you are just paying the most for the same defined benefit, he told me i didnt understand how great a plan this was because i could buy the insurance out for the NITR value and get a great deal. I had also questioned him about these plans being appropriate for older people closer to retirement and he told me that wasnt true. My accountant was present and took notes on the details of buying it out so cheaply. i later learned this was all illegal and that the real value is substantially more. I contacted Guardian who at first said i had no proof but then i sent them the notes from the accountant and the emails from the agent. They have never responded despite my requests. The state insurance comm found the agent's testimony on the buy out value not likely credible but said that insurance within a defined benefit plan isnt under their watch and i had to take it up with DOL. Does anyone know how successful one can be at suing to get out of this. I just wanted my money back and avoid this agent's scheme.

[GBurns]

My first thought is that your state insurance dept did not understand you, then I realized that maybe they were answering whatever question you asked but I have no idea what you asked of them. You might not have asked the proper questions.

What did they say about Guardian not responding?

You also did not indicate your state of residence for the purchase.

I have heard of successful lawsuits and also of out of court settlements, but I did not keep any info and am not in that market. That is something a lawyer with relevant experience would be able to easily find. This should be part of his initial conversation with you which should be free.

I am sure that there are members of the Board who can help direct you.

[Guest rex]

My first thought is that your state insurance dept did not understand you, then I realized that maybe they were answering whatever question you asked but I have no idea what you asked of them. You might not have asked the proper questions.

What did they say about Guardian not responding?

You also did not indicate your state of residence for the purchase.

I have heard of successful lawsuits and also of out of court settlements, but I did not keep any info and am not in that market. That is something a lawyer with relevant experience would be able to easily find. This should be part of his initial conversation with you which should be free.

I am sure that there are members of the Board who can help direct you.

thanks for the reply. Im in GA.

Guardian at first wrote me a letter in essence saying i had no proof and that i had a 10 day free look period (like i would have been able to determine these things in 10 days especially given the lack of good literature on the subject and that somehow i should have known that this guy was lying). That is what they sent the insurance comm. I then sent them the proof (which frankly im sure they had since i imagine they have access to the agent's emails and i sent them the notes from the accountant). They never responded to the additional info and never commented on it to the insurance comm. The funny part is their letter specifically says if i have an evidence that i could send it to them. I guess they didnt mean it. I contacted the comm again and they said if i had the accountant send his notes and state that he was present that they would turn it over to their enforcement (why they didnt just call him is a mystery to me) but that i still might not get my money back bc it is within a DB plan. im having him do that but as you might imagine he isnt super happy about it since he is concerned it will affect his business. Im sure he will do it this week but he doesnt like being involved. He originally sent me to this "financial advisor" so i know he feels bad at the same time. Additionally Guardian knows a 412i isnt appropriate for a 39 year old. How the heck they dont get involved earlier is just ludicrous. i actually had given this guy term, disability and 401k as well so it makes me in particularly mad that he would be such a bad person. i got rid of the guardian term and disability after i got their letter. They would have made more money with the other products since i would have kept them in place. now for sure i tell younger docs about my experience.

im worried about the costs and time of going legal and it is next to impossible to find someone local who has a clue about these plans. i really thought at first once i sent guardian the proof they would just give me my money back. i imagine now they will just delay as long as possible since they had all my financial info and know i cant pursue this indefinitely from a cost standpoint.

[Ron Snyder]

Your arguments are on point. The Guardian doesn't like to lose lawsuits and has been willing to settle such cases on a favorable basis. You will need a plaintiff's attorney knowledgeable in the area to handle your case. If you wish to contact me off the board, I can refer you to a couple to choose from. Or you can simply go to Martindale and go through their search for an A,V rated litigator that specializes in taxes and insurance.