Life insurance in a Cash Balance Plan

[Renee H]

I am the TPA for a client with an over-funded cash balance plan.  Husband and wife participants. Both age 42.  His investment advisor is recommending that the plan purchase a life insurance policy.  I recall a time when life insurance was a popular choice in DB plans but primarily to fund contributions.  I no longer have any plans that contain a life insurance product and prefer to keep it that way.  His plan will need to be amended to permit this. Since I am not current on the rules, I would love to hear from some of you experts who can give me an opinion on whether it makes sense to purchase one from an over-funded CB plan?   

[Effen]

Putting insurance in a pension plan is usually a great idea if you are the agent making the sale.  Your client should talk to their accountant and/or financial advisor (not the one selling him/her the insurance) and determine if it makes sense from a long term financial perspective.  It might be a great idea, but more likely a its a horrible idea.   

[david rigby]

Exactly!  Whenever I see the phrases "husband and wife" and "cash balance" and "overfunded", I wonder if the last one is true.  Has there been a real 415 test? 

A consulting actuary would ask lots of questions, which might include: Why is a husband/wife plan structured as cash balance rather than traditional DB?  Do the participant(s) have health status that impairs insurability?  What is the magnitude of any "overfunding"?  What are the ages of the participants?  How soon do the participants plan to retire/cease working?  Are there others (e.g., children) that might join the business?  Do the participants plan to choose a lump sum distribution (at some later date) or choose a J&S payment form?  Does the business also have a DC plan?  A really good consulting actuary will explain to the plan sponsor how these questions are inter-related.

[truphao]

10 hours ago, david rigby said:

Exactly!  Whenever I see the phrases "husband and wife" and "cash balance" and "overfunded", I wonder if the last one is true.  Has there been a real 415 test? 

A consulting actuary would ask lots of questions, which might include: Why is a husband/wife plan structured as cash balance rather than traditional DB?  Do the participant(s) have health status that impairs insurability?  What is the magnitude of any "overfunding"?  What are the ages of the participants?  How soon do the participants plan to retire/cease working?  Are there others (e.g., children) that might join the business?  Do the participants plan  to choose a lump sum distribution (at some later date) or choose a J&S payment form?  Does the business also have a DC plan?  A really good consulting actuary will explain to the plan sponsor how these questions are inter-related.

It is very easy to do something, but “undoing” is where the problems begin.

So I am adding the following to the list:
How easy will it be to obtain the annual market value of the insurance policy for actuarial valuation purposes?
When the Cash Balance Plan is terminated, what will happen to this life insurance policy? (No — a typical “free” IRA will not be able to hold it.)
Will the current actuary be willing to perform services for a plan that includes life insurance, or will you be required to find another actuary?