412(i) plan - premium not paid - how to complete Schedule B

[Lorraine Dorsa]

I have a fully insured 412(i) plan which is terminating this year and the client will not pay the annual premium. All insurance contracts are annuities with about a 4% return.

To be a 412(i) plan, premiums must be paid timely and therefore this plan no longer satisfies 412(i) and is therefore no longer exempt from the minimum funding standards.

My question is what about the actuarial valuation and Schedule B.

If I run an actuarial valuation, I'll have to select a funding method and use reasonable actuarial assumptions. If I select Individual Aggregate and use a 4%interest assumption, the normal cost would be about the same as the premiums. Is it reasonable to use a 4% interest assumption since all $ are invested in annuity contracts paying about 4%?

Is there anything else I need to consider?

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[Guest Bill]

Could be a number of different issues, I guess . . when plan was set up was it funded at beginning or end of year, i.e. is a premium really due or could plan be considered funded through the year of termination? If it does fall out of 412(i) couldn't you use a cost method other than IA that might not require as much of a contribution (or maybe none). Is the annuity earning 4% currently or is that the guarantee - if it's earning higher, it would be safe to assume the higher rate. Just a few thoughts that might help . .

[Lorraine Dorsa]

Plan has been valued at beginning of year to determine premium so I think premium is clearly applicable to the current year and therefore is due.

Annuity contracts have a guaranteed 4% interest rate and have been earning some excess dividends, but no more than an extra 1/2% or so per year.

If I use an interest rate of 4 or 4.5% and a method like aggregate, I will come up with a lower actuarial cost than the unpaid premiums, but still a non-zero amount.

Sound reasonable?

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[Guest Bill]

Sounds like you'd already covered all the bases, I agree your approach sounds like the only alternative - finding a cost method that can produce the lowest cost. I guess the only other issue is how aggresive you can be with the interest rate if this deposit isn't going into the annuity (I assume it isn't or client may be better off to just fund one more year of annuity and then freeze or terminate plan) Are there many employees involved? Cost of funding accrued benefits may be more complicated and expensive than just the annuity premium if plan is terminated as I'm sure you know.