former 412i plan,

[Gary]

I am reviewing a DB plan.

It has 6 participants.

Two of the participants are family member owners.

The plan was at one time a 412i plan for only the two owners and life insurance purchased on their behalf.

The plan is now treated as a traditional DB plan.

The plan provides a death benefit equal to PVAB for all employees.

Issues:

1. Re: two life policies, one policy has death benefit greater than participant’s PVAB, so I can see this being a case of excess deductions due to a policy above what the plan provides and I don’t see it permissible to have the plan be the beneficiary of such proceeds

2. And if policy proceeds has to go to specified beneficiary then plan is discriminatory re: available benefits, rights, features

3. Even if plan could be beneficiary and only PVAB paid to beneficiary, there still may be a benefits right discrimination issue

What else am I missing?

Solution:

1. Go thru VCP and determine if polices can be sold to participants at FMV, or surrender policies

2. Stay away from plan

Thoughts?

Thanks

[mbozek]

I dont know the answer to the question you presented but you should check to see if Congress ever removed the 200k excise tax penalty on advisors who were involved in 412i plans that were deemed to be listed transactions. If this penalty is still possible you may want to reconsider representing the client.

My own conservative view is that the client needs expert tax counsel to advise them on how to proceed and the attorney would then retain advisors such as actuaries who would be protected by attorney client privledge.

Question is this 412i plan a listed transaction?

[Gary]

since the life insurance is less than 100 times the projected benefit why not provide the same life insurance to all active employees and amend the plan to provide for the higher death benefit?

thanks

[mbozek]

since the life insurance is less than 100 times the projected benefit why not provide the same life insurance to all active employees and amend the plan to provide for the higher death benefit?

thanks

I dont know whether it will cure the violation b/c the failure to provide non discriminatory LI for the non owners in prior years may be a listed transaction which triggers the extreme tax penalities b/c the requisite notice of the listed transaction was not provided to the IRS. You need to check with a tax advisor or attorney who is familiar with 412i violations.