Life Insurance in DB Plan

[retbenser]

DB plan with a participant (NHCE) age 75 getting RMD. (There are other HCE participants).

Question:

Can the plan participant who is also a trustee choose to use part of the plan assets to purchase a life insurance policy on her own life? There is no other NHCE in the plan.

[ETA Consulting LLC]

You know if you write a death benefit into the plan (i.e. life insurance payout up to 100 times monthly benefit and is offset by the QPSA amount), then this will apply to all employees. Otherwise, the life insurance benefit, itself, will be discriminatory. Your question appears whether the trust, itself, can own a life insurance policy on the business owner when there is no death benefit offered under the plan. I think it "may", but in very modest amounts. Suppose the plan is underfunded. Being a small employer, this plan will terminate underfunded should the business owner die. It may be prudent to invest in a life policy to ensure the plan is adequately funded in the event the business owner dies prior to actually fully funding the plan in future years. This will ensure the payout of the full benefit under the written terms of the plan to all employees.

The key is that the life policy, itself, cannot be used to benefit the owner as a individual under the plan, but "may" be done for the plan as a whole.

Good Luck!

[retbenser]

You know if you write a death benefit into the plan (i.e. life insurance payout up to 100 times monthly benefit and is offset by the QPSA amount), then this will apply to all employees. Otherwise, the life insurance benefit, itself, will be discriminatory. Your question appears whether the trust, itself, can own a life insurance policy on the business owner when there is no death benefit offered under the plan. I think it "may", but in very modest amounts. Suppose the plan is underfunded. Being a small employer, this plan will terminate underfunded should the business owner die. It may be prudent to invest in a life policy to ensure the plan is adequately funded in the event the business owner dies prior to actually fully funding the plan in future years. This will ensure the payout of the full benefit under the written terms of the plan to all employees.

The key is that the life policy, itself, cannot be used to benefit the owner as a individual under the plan, but "may" be done for the plan as a whole.

Good Luck!

Thanks. Please note the participant is already past normal retirement age and is collecting RMD (pending final distribution election). There is no discrimination issue since there is no other NHCE in the plan. There is no deduction issue also. The trustee just want to sell some stocks and invest the proceed in a life insurance policy on the NHCE participant who is 75 years old. Is this possible without violating any law or regulations? Thanks.

[SoCalActuary]

Under $50,000 face amount, you can avoid taxable income to the NHCE participant, if done correctly.

Above that, you create a taxable event.

What is the motive for a life insurance benefit? Does the participant have no insurance? At 75, are they insurable? Who has an insurable interest?

How does this help the plan?

I assume you are not describing an annuity contract.

[retbenser]

Under $50,000 face amount, you can avoid taxable income to the NHCE participant, if done correctly.

Above that, you create a taxable event.

What is the motive for a life insurance benefit? Does the participant have no insurance? At 75, are they insurable? Who has an insurable interest?

How does this help the plan?

I assume you are not describing an annuity contract.

The motive is estate planning. But notwithstanding the purpose, is it possible (legally) to use plan assets to buy the life insurance policy?

[SoCalActuary]

So the intent is to trade tangible assets for the gamble that even more money is available to the participant's estate upon death.

Plans can certainly amend their provisions to include a death benefit, and can buy insurance for a non-discriminatory group.

The participant should be taxed on the current income that results from employer provided death benefits.

So go ahead. You are reducing plan assets available for retirement in exchange for giving a participant's beneficiaries a higher payout.

This might require the employer to pay more for the retirement plan if it is a defined benefit, unless the plan is overfunded.

Further, it is an increase in benefits, so you must confirm that the plan has a sufficient AFTAP to allow it.

[shERPA]

Since the participant is past NRA, presumably any post-retirement death benefit would be part of the retirement benefit under 415. Under 415 a plan can provide a life annuity or a J&S unreduced, but other forms of benefit must be adjusted to the actuarial equivalent of the life annuity. For example a life/10cc benefit would have to be reduced to the actuarial equivalent of a life annuity for 415 purposes because the 10cc is a form of death benefit.

So, I think one would have to look at the participant's 415 limit and determine the actuarial value of the post-retirement death benefit and limit it accordingly.

Don't see a non-discrimination issue if the plan is providing an enhanced death benefit for NHCEs only. I don't think but have not researched if such a benefit would have to separately satisfy (a)(26).