Insurance in Plan

[Dougsbpc]

Small defined benefit plan covering a business owner and 3 employees. The business owner has a higher benefit than employees in the DB and the employees get a 15% of salary contribution in the DC plan.

We don't have any other plans with life insurance but this one does have a policy on the business owner. The employees will need to have comparable policies (for example if the business owner has a policy of 50 times monthly benefit, employees need the same). The problem is the employees have smaller benefits in the DB. I think the employees will then need comparable coverage in the DC plan.

The insurance agent is telling me his home office legal department claims that employees can waive insurance in the DC plan. I know this is probably the case for a DC plan by itself but don't think it is possible in this case.

Any thoughts?

Thanks.

[ETA Consulting LLC]

Without knowing the exact details, there are two thoughts that come immediately to mind about this scenario:

1) In a DB plan, all benefits (including a death benefit) are defined under the terms of the plan. That doesn't appear to open the door to individual elections of whether to 'invest' in insurance (unlike in a DC plan). So, it would be interesting to read a DB provision stating that one person will get insurance but the other does not.

2) The legal department of an insurance company will never give any statement that should be considered relevant to any plan other than one actually sponsored by the insurance company for the benefit of their employees. Not being sarcastic, but insurance agents sell insurance; not administer plans. The legal departments of the insurance companies do not provide legal advise for administering plans.

Okay, 1 more: 3) Obviously, in a DC plan; the plan may be written to allow participants to invest in life insurance. Hence, this will be an individual decision made by each participant. Of course, with any plan, the incidental limits will apply.

Given all this, it is up to the TPA/actuarial firm servicing the plan(s) to ensure the plan(s) meet all the form and operational requirements for qualification. This will include having the plan language necessary to determine the benefits being given and the non-discrimination tests necessary to prove that benefits, rights, and features are being provided on a non-discriminatory basis; just to name a couple.

These are just thoughts because I'm not sure I understand your question (or if you're asking one).

Good Luck!

[david rigby]

The insurance agent is telling me his home office legal department claims that employees can waive insurance in the DC plan. I know this is probably the case for a DC plan by itself but don't think it is possible in this case. Thanks.

Not accusing anyone of "fibbing", but my spidey-sense tells me to be skeptical that the agent ever talked to the legal department.

Aside from the comments in Post #2, there is also the question of whether the DB plan should have any life insurance. This is not an academic question, and deserves an answer.

[shERPA]

The DB relies on the DC contributions to pass non-discrimination, the DB benefits on their own would be discriminatory, right?

So it then follows, if each participant gets an ancillary death benefit in the DB plan of 50x the monthly benefit, then the death benefit will also be discriminatory because it is based on discriminatory benefit amounts.

The death benefit cannot be made non-discriminatory by simply offering additional insurance in the DC plan (whether or not the employees waive it) because the insured death benefit is paid for by participants in the DC plan, whereas it is employer-paid in a DB plan.

Stated another way, providing the insured death benefit in a DB does not reduce a participant's eventual retirement benefit. However purchasing insurance in a DC plan does reduce the eventual retirement benefit because the premium is charged against the account balance of each participant.

There is at least one firm out there designing combo plans with insured death benefits where they say they provide additional employer-paid contribution to the DC plan to pay for the insurance necessary to make the death benefit non-discriminatory. If there is a right way to design such plans this is probably it. Personally I choose not to go there and do not design or administer combo plans with insured death benefits.

As far as any supposed legal advice from the insurance company, I agree with the other comments. If the agent brings it up, ask for an opinion in writing and that the insurance company indemnify the client - you won't get either.