Life Insurance in Cash Balance Plan

[Old Reliable]

Is Life Insurance permissible in a cash balance plan? If yes, how is the 'incidental' limit calculated? Is it 100x projected benefit as in DB plans, or a % of contribution? Is it discriminatory unless policies all purchased on all participants? Any guidance is appreciated! Thank you

[Lou S.]

Yes, 100x projected monthly benefit is max as a CB Plan is a type of DB Plan.

Purchase of Life Insurance must follow terms of the Plan Document and must be done in a non-discriminatory manner.

 

[John Feldt ERPA CPC QPA]

So the question should be asked, how does the cash balance plan pass nondiscrimination?

[truphao]

my question is what is the point of putting a tax-deferred vehicle inside the tax-deferred vehicle?  Especially given that on average CB life-span is 6-7 years?  

[Bird]

53 minutes ago, truphao said:

my question is what is the point of putting a tax-deferred vehicle inside the tax-deferred vehicle?  Especially given that on average CB life-span is 6-7 years?  

To make a commission

[truphao]

7 minutes ago, Bird said:

To make a commission

Thank you, now I understand.  Putting a high-comission long cost-amortization period financial tax-deferred product inside a tax-deferred plan which is likely to get terminated in 5-6 years to create a maze of non-dsicrimination, valuation and compliance issues.  Nevermind that it is practically impossible to obtain a "market value" of the policy and that a life insurance cannot be rolled over into IRA upon termination.  Did I get it right?

[Old Reliable]

of course we all know this question was prompted by a life insurance "specialist" 🤔

[CuseFan]

There are some very limited circumstances when putting life insurance into a pension plan makes sense, but I would say unless such suggestion came from an independent certified financial planner or similar advisor who does not also happen to sell life insurance, I would avoid insurance and the person selling it. Unless you know (and the insurance company doesn't) that you're going to die in the next few years, in which case I say load up!

[ErnieG]

Considering the sentiment around life insurance in many of these forums which I respect, as a Planner, I am taking another approach.  In addition to the 100X's Rule the Theoretical Reserve Rule under 74-307 is also used.  We've seen offering this asset, life insurance, which is not correlated to the market, which offers guarantees, a potential for dividends or excess interest, a death benefit that is partially income-tax free at a small cost, and provides an exponential survivor benefit, makes sense in some (stressing some) cases.  I believe we all agree we must get paid for our services, how and how much are driven by the client.  With life insurance in many cases the totality of the commission received from the carrier offsets other fees that are being charged for various services to Plan and Employer. Bottom line, is it in the best interest of the client and are you fulfilling a fiduciary responsibility.

[truphao]

ErnieG, there is something that always escaped me; so I am hoping you (or others) can explain this conceptually.  If the life insurance policy is owned by the Plan, then it is a Plan's assets.  In case the Owner passes, the Plan receives the policy payment.  It is still within the Plan.  Then, how does it become "partially-tax free"?  I am not trolling, I just do not have enough knowledge/experience with life insurance products.

[ErnieG]

truphao:  The life insurance policy is an asset of the Plan, it is as any other asset, owned by the Plan and the Plan is the beneficiary.  The employee maintains a beneficiary designation on file, similar to other investments.  Upon the death of the insured the death proceeds are passed to the Plan.  Upon claim of the Plan's assets by the beneficiary, the life insurance proceeds are split, the net death benefit represented by the face amount of the policy minus it's cash value, is passed to the beneficiary income-tax free.  The cash value is added to the other investment and becomes a taxable distribution eligible for transfer/rollover to an IRA or other retirement plan that accepts transfers/rollovers.  The 1099 issued reflects the death benefit and the eligible distribution.  The calculation of the the net amount at risk and the cash value is performed by the life insurance company as of the date of date showing exactly the face amount and cash value.  If there is any basis in the policy (recouped economic benefit cost, known as the PS 59 cost), that is the responsibility of the insured to track.

[Bill Presson]

59 minutes ago, ErnieG said:

truphao:  The life insurance policy is an asset of the Plan, it is as any other asset, owned by the Plan and the Plan is the beneficiary.  The employee maintains a beneficiary designation on file, similar to other investments.  Upon the death of the insured the death proceeds are passed to the Plan.  Upon claim of the Plan's assets by the beneficiary, the life insurance proceeds are split, the net death benefit represented by the face amount of the policy minus it's cash value, is passed to the beneficiary income-tax free.  The cash value is added to the other investment and becomes a taxable distribution eligible for transfer/rollover to an IRA or other retirement plan that accepts transfers/rollovers.  The 1099 issued reflects the death benefit and the eligible distribution.  The calculation of the the net amount at risk and the cash value is performed by the life insurance company as of the date of date showing exactly the face amount and cash value.  If there is any basis in the policy (recouped economic benefit cost, known as the PS 59 cost), that is the responsibility of the insured to track.

Well done.

[Jakyasar]

Of course, the CB does not benefit the owners on a maximum level where all little guys get a minimal benefit, right? You have to be very careful with BRF issues.

ErnigeG explained quite well however, make sure to read what the plan document states for death benefit, generally should state face amount+PVAB-cash value.

One correction, PS 58 cost.