412e Question

[Purplemandinga]

Please excuse my ignorance, but I'm looking at a life insurance annuity inside of a 412e plan that has an account value that exceeds its guaranteed cash value because more than just the premium payments have been paid to it it over the years. Is this a cause of concern?

[shERPA]

There are always concerns when 412(e) is involved.

Assuming the policy fully provides for the plan's benefit, from a qualification aspect the plan might be OK, but refer back to my first sentence above.

The excess premium payments (aka contributions) might not be deductible.   Furthermore, if the plan already provides for a benefit at the 415 limit, then there's no place for the money to go (refer back to my first sentence above).

In 2004 IRS came out with all sorts of bad news for abuses in fully insured plans, up to and including "listed transactions" for buying insurance in excess of the plan benefits.   I am not an expert in listed transactions and have no idea if this would apply here, refer to ERISA counsel and of course, refer back to my first sentence above. 

[Purplemandinga]

So you're saying there's a chance.

[ErnieG]

Purplemandinga these Plans, if properly designed and administered remain viable.  As mentioned, the IRS has issued guidance on these Plan however, if the Plan was properly established, the account value should not exceed the cash value as the dividend option should have been to reduce future premiums.  The fact that this Plan may be out of 412(e)(3) compliance may mean it is not a 412(e)(3) Plan afterall and could be administered as a Tradional Defined Benefit Plan.