revisiting life insurance in combo plans

Hi

Revisiting the life insurance issues in combo plans. This time not a floor-offset.

DB or CB plan combined with a DC plan.

All HCE's are at maximum benefit under DB/CB and rank&file minimum to pass 401(a)(26).

DC plan, in addition to the deferrals+3% non-elective SH has PS allocations, say minimum 4.5% to pass gateway (SH+PS=7.5% of compensation).

Agent wants insurance in the DB/CB only. is this not a BRF issue?

If additional insurance is provided under the DC plan, the rank&file is forced to pay from their portion of contributions as their benefit is primarily provided under the DC plan.

What am I not seeing clearly here and if there is a way to pass BRF, how is it accomplished?

Thank you for you thought/comments.

We approach this by separately testing each Plan, we do not combine them.  If life insurance is being used in the DB portion it must pass on its own.  The downside is less goes to the HCEs, you lose the ability to use the DC Plan's contributions.  We'd suggest using life insurance outside the Plan to cover the HCEs on a Non Qualified Deferred Compensation arrangement.

It's like Whack-A-Mole.  

You see the issue clearly.   What agent wants to do is discriminatory.  What ErnieG says will work, but it's more expensive to cover NHCEs. 

Some say they provide an additional PS contribution, over and above what is necessary to pass (a)(4) testing, to cover the insurance premiums needed to provide insured death benefits in the DC plan that equal the relative HCE death benefits in the DB plan.   Arguably this could work, but this would be a huge amount of work to initially calculate and then monitor and adjust annually to keep death benefits non-discriminatory.  Who is going to do this work and who is going to pay for it?

Once all that work is done and paid for, and once the additional PS contributions are made to pay for the NHCE insurance, what's the point?  What is the economic benefit of buying life insurance for HCEs in the DB that makes all of this worthwhile?   

Not to hijack the thread, but can someone explain how it works in a floor-offset?  I was asked about it and what was proposed seemed equally un-worthwhile.  I'm fortunately at a point where I can shrug my shoulders and say I don't want to bother with it, but am curious.

Hi Bird

We had a discussion back in October, here is the link, I hope it works. Not sure what your question is.

15 hours ago, Jakyasar said:

We had a discussion back in October, here is the link, I hope it works.

Thanks/yes that helps.

On 9/1/2020 at 4:31 PM, shERPA said:

What is the economic benefit of buying life insurance for HCEs in the DB that makes all of this worthwhile?   

I think we all know the answer to this as long as we include the agent's compensation in the universe of judging "economic benefit".

1 hour ago, acm_acm said:

I think we all know the answer to this as long as we include the agent's compensation in the universe of judging "economic benefit".

Ha ha!  Yes, you are right,  I should have been more specific.  "What is the economic benefit to the client of buying life insurance...."   Since the client is paying the bills.  

Hi

Going back to what ErnieG said about testing.

Let's say HCE benefit structure is 100% of  and all NHCE's 0.5% of compensation.

The LI is the same for all i.e. 100X of benefit and WL. Does this pass the test for the DB plan as everyone is getting the same insurance percentage?

Nothing will be done in the PS plan, just contributions.

Just curious.

Thank you

No.

15 minutes ago, shERPA said:

No.

Not so fast. If this was a question for a client that was being audited and they'd already done this I would take the time to go into the archives wherever they may be and find the ask the experts session from asppa annual where Kyle from either treasury or IRS (i forget which) opined exactly the opposite. It was in response to a question that Larry Starr asked and after Kyle gave his unbelievable response Larry went back to the microphone and tried to convince him he didn't hear the question correctly. As I recall Kyle doubled down and basically said if you pass amounts testing even if you include the profit sharing to do so insurance in the defined benefit plan can be based solely on the normal retirement benefit payable in the defined benefit plan. Fwiw

35 minutes ago, Mike Preston said:

Not so fast. If this was a question for a client that was being audited and they'd already done this I would take the time to go into the archives wherever they may be and find the ask the experts session from asppa annual where Kyle from either treasury or IRS (i forget which) opined exactly the opposite. It was in response to a question that Larry Starr asked and after Kyle gave his unbelievable response Larry went back to the microphone and tried to convince him he didn't hear the question correctly. As I recall Kyle doubled down and basically said if you pass amounts testing even if you include the profit sharing to do so insurance in the defined benefit plan can be based solely on the normal retirement benefit payable in the defined benefit plan. Fwiw

Yeah, do you have that disclaimer script handy that is read at the beginning of every session that includes government speakers?   

I agree I would use this, and anything else I thought might stick to the wall once it's an audit situation.  But to knowingly set up a plan on this basis, not so much.  As you say , it's an "unbelievable response".

Just now, shERPA said:

Yeah, do you have that disclaimer script handy that is read at the beginning of every session that includes government speakers?   

I agree I would use this, and anything else I thought might stick to the wall once it's an audit situation.  But to knowingly set up a plan on this basis, not so much.  

Agreed.