Viator policies in profit sharing plans

[Guest MELODY LOVE]

Do Viator Policies in a profit sharing plan meet the definition of "qualifying plan assets"? Are they an acceptable investment for a qualified (401 a) plan?

[Kristina]

When you say "Qualifying Plan Assets" do you mean for the purposes of the new small plan audit guidelines? And are these policies ones that the plan has purchased from the insureds and is holding as an investment of the plan with the expectation that the insured will die and the plan will receive the gain of the investment?

[david rigby]

Are the insured lives "related" in any way to the plan or the plan sponsor?

[Bill Berke]

We need lots more details.

[Guest MELODY LOVE]

There is no relationship between the plan sponsor and the insured life under the viaticated life insurance policies. An application is submitted to the company offering viator policies and the life expectancy of the insured, the number of such policies desired and the fixed return rate (12% to 60%)which varies depending upon the life expectancy is selected on that application. There are no AIDS cases and life expectancy is determined by an independent group of doctors. My understanding of the product is that you are basically purchasing a life policy on a person who is expected to die within a somwhat specified period of time. The company offering the product selects the insureds upon the requested options on the product's application. I am wondering if it falls under qualifying assets as defined under the new small plan audit rules (for this plan it would be effective 2002). I've never seen this type of investment in a profit sharing plan. Another concern is: is this an appropriate investment for a qualified plan? I suppose it is no worse than life insurance?????

[k man]

Absent the existence of limitations or provisions concerning this type of investment in the plan document, you would not be able to say they are an uacceptable investment, per se. However, unless the plan is an individual account plan or the assets are actually being "held" by and insurance company, it is not likely that they meet the definition of qualifying assets. Furthermore, there might be questions concerning diversification and whether the investments are actually prudent.

Lastly, I do not think you can make the statement that these investments are "no worse than life insurance." They really are two different things. Viaticals are not Life Insurance. In fact, there are many moral issues concerning viaticals but they are really are not relevant in this case.

[Guest MELODY LOVE]

K MAN, I WAS NOT MAKING THE STATEMENT THAT THEY ARE NO WORSE THAN LIFE INSURANCE - IT WAS A QUESTION! I CANNOT TELL FROM THE ISSUED STATEMENTS IF THE VIATORS ARE HELD BY A BROKERAGE FIRM OR AN INSURANCE COMPANY. YOU RAISED THE MORAL ISSUE - PERHAPS THIS IS PART OF MY DISCOMFORT WITH THE INVESTMENT. THE PLAN ALSO HOLDS ANNUITIES AND MUTUAL FUNDS AS INVESTMENTS. THE PLAN DOCUMENT DOES NOT APPEAR TO PROHIBIT THE INVESTMENT. IS THIS A COMMON INVESTMENT FOR A QUALIFIED PLAN THESE DAYS?

[k man]

My point was not to defend life insurance but just that i think that they are very different investments. I cant answer the question as to whether they are actually common but we dont see or use them in any of our plans.

[david rigby]

"Are these investments common?" I think the question answers itself. No they are not common, else you would not have to ask.

I'm a bit disturbed by the statement "...there are many moral issues concerning viaticals but they are really are not relevant in this case." Moral issues are always relevant. They may not be a legal issue, but that does not eliminate their relevance.

There is a different question as to whether in fact viatical policies are immoral. My reading on this subject does not draw a conclusion (but that is my opinion). However, my hunch is that many employees would not find this to be an attractive investment option. Just a guess.

[k man]

this might be off on a tangent but if the investment is legal how is the moral issue relevant? I think of the moral issue as similar to whether or not a plan should invest in so called "socially responsible" mutual funds. when push comes to shove the performance of the investment will be compared with the performance of similar investments. Thus, I would imagine, the majority of participants would not care what there profit sharing plan was invested in as long as it was safe and the performace was good.

[Bill Berke]

First, you are treading in new territory and the unknown issues will come up upon a participant's death - probably when the estate tax return (FORM 706) is filed. Most important, to me, is that all the participants were offered this opportunity. You must really make sure that you do not accidently violate 401(a)(4). If there are any problems they will be magnified because they will fall upon the beneficiaries and they will be very unhappy with the employer, trustees and insurance agent. If the policies are qualify as viatical policies (IRC Section 101 has all the details), then they are legal plan investments and come under the small plan asset rules. The premium restrictions will be those applicable for whole life policies (50% rule). However, if the participant is receiving the benefit as a distribution while employed then you probably have a problem if the plan is a DB, MPP, 401(k)(no triggering event) or a PS plan without the aged money language (and the premiums come from the aged money). But I could see the IRS claiming the aged money rules apply as of the date of policy issue. And who knows anything in this area? I'm sure guessing.

[Kristina]

to Bill Berke,

Viatical policies are policies that are owned by unrelated parties who are not participants in the plan who find themselves in the position of being in such poor health that they offer their policies for sale on the open market. Those investing in the viatical policy pay a given amount of the face and/or cash value and take over ownership of the policy and continue paying the premiums. The investor is betting that there will not be too many premiums required to keep a policy in force before the insured dies. These policies do not fall within the incidental death benefit requirements of a qualified plan nor is there an interested party involved normally.

The moral issue involved here is the fact that the investor is betting the insured will die soon. On the other side, the insured is receiving benefit of the proceeds during his life to pay expenses might bankrupt his family otherwise.

[Bill Berke]

Long-standing rules require that the trust which is part of a plan must be the beneficial owner of all assets including insurance policies. Anything else is not a plan asset. If the money for policy comes from a plan somehow - and if the asset purchased is not owned by the trust - then the monies paid for the policy would be a plan distribution subject to all the distribution rules. The moral issues are not a plan or fiduciary consideration. The rules to be concerned about are the plan asset, tax law and fiduciary rules. I suppose if the plan is buying the policies from the insureds - who are unrelated (IRC 101 controls this) - then you are dealing only with the ERISA fiduciary requirements- not to be taken lightly. In my mind (please don't think I'm heartless) I make the comparison to the risk assessment that must be done when any risky investment is made such as raw land or commodities. And how would you annually value the policies? And what happens if there are problems with immediately collecting the death benefit? Which participants are entitled to what and when? And other questions that I can't think of on a Friday.