Insurance Question

[Dougsbpc]

We don't administer very many plans that have insurance but this particular plan is a one participant traditional defined benefit plan that we inherited. When the plan was established, the proper amount of insurance was purchased (no more than 100x the projected benefit).

Is this 100x rule effective just for the year the insurance was put in place?  I would think so for the following reasons:

1. The company could have an unexpected downturn in business resulting in smaller average compensation and therefore a smaller benefit than anticipated.

2. The plan could be frozen at some point for a few years or so and then the participant might end up with a smaller benefit than what the original projected benefit was.

Thanks.

[ErnieG]

The 100x rule is based on the projected monthly benefit at normal retirement age.  Therefore, as the projected benefit increases so will the life insurance to maintain 100x's.  If the projected monthly benefit is decreased, likewise, the life insurance would be decreased to maintain the 100x's and to remain incidental.  You would also need to review the Plan Document and the life insurance carriers' limits regarding policy increases.    

[Lou S.]

If you fail the 100x rule because the projected benefit dropped, I believe there are one or two other acceptable methods of satisfying the incidental death benefit rules but I'm that familiar with them so you'd need to look at the regs.

[Jakyasar]

If 100X fails, try RR 74-307 rule but keep in mind that it is based on years of participation only, cannot use years of service.

When determining the lump sum for 74-307, 415 limit should be adhered to i.e. do not base the lump sum based on a very high mortality table that exceeds 415 lump sum at NRA. This lump sum is based on projected monthly benefit at NRA which can change from year to year.

If you continuously reduce the benefits and/or freeze the plan, you will need to recalculate the insurance coverage and make sure that incidental limits are not exceeded.

When applying RR 74-307, do not forget the 66.66% rule for whole life and 33.33% for universal/term life.

You can certainly flip flop using 100x or RR 74-307, no requirement that it has to be the same method to check.

However, as always, please check the plan document language and see what is allowed and what is not.

My 2 cents FWIW. FYI, I hate insurance in any pension plan, nothing but trouble and never explained by agents properly and what the consequences are, what do I know.