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Life Insurance in Split-Funded Defined Benefit Plans


Life Insurance in Split-Funded Defined Benefit Plans For financial professional use only. Not for client presentation. For financial professional use only. – PowerPoint PPT presentation

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Title: Life Insurance in Split-Funded Defined Benefit Plans

Life Insurance in Split-FundedDefined Benefit
  • Bill Schatz, Regional Marketing Director

  • This material was not intended or written to be
    used, and cannot be used, to avoid penalties
    imposed under the Internal Revenue Code. This
    material was written to support the promotion or
    marketing of the products, services, and/or
    concepts addressed in this material. Anyone to
    whom this material is promoted, marketed, or
    recommended should be urged to consult with and
    rely solely on their own independent advisors
    regarding their particular situation and the
    concepts presented here.

What Is a Qualified Retirement Plan?
  • Provides retirement benefits
  • Must meet specific IRC requirements
  • Qualifies for tax-favored treatment
  • Deductible contributions
  • Tax-deferred growth
  • Plan cannot discriminate

Qualified Plan Comparison
Defined Benefit Defined Contribution
Retirement benefit defined in advance Retirement benefit based on contributions and performance of plan investments
Employer bears investment risk Participant bears investment risk
Life insurance as a plan asset mayincrease contributions Life insurance as a plan asset does not increase contributions
Why Are Defined Benefit Plans Popular Again?
  • Favorable pension reform EGTRRA 2001
  • Compensation/contribution limit increases
  • No family aggregation
  • Pension Protection Act of 2006
  • Deductibility limits for contributions to both
    defined contribution and defined benefit plans
    (covered by the PBGC) sponsored by the same
    employer repealed effective 1/1/2008
  • Transitional relief provided

EGTRRA Increases Compensation and Benefit
Limitations Defined Benefit Plan
2005 2006 2007 2008 2009/2010
IRC Section 401(a)(17) Compensation 210,000 220,000 225,000 230,000 245,000
IRC Section 415 Annual Benefit 100 of pay not to exceed 170,000. Reduced if benefit starts before age 62. 100 of pay not to exceed 175,000. Reduced if benefit starts before age 62. 100 of pay not to exceed 180,000. Reduced if benefit starts before age 62. 100 of pay not to exceed 185,000. Reduced if benefit starts before age 62. 100 of pay not to exceed 195,000. Reduced if benefit starts before age 62.
Traditional Defined Benefit Plans vs. 412(e)(3)
  • Both are defined benefit plans
  • Similar client profiles
  • Large tax-deductible contributions
  • Differences
  • Investment flexibility vs. product guarantees
  • Minimum funding standard
  • Actuarial Certification

What is a "Split-Funded" Defined Benefit Plan?
  • A traditional defined benefit plan that includes
  • Investments
  • Life insurance

What About the Plan Benefit Options?
  • Taken as retirement distributions
  • IRA rollover
  • Rollover to another qualified plan

Types of Investments
  • Stocks
  • Bonds
  • Mutual funds
  • Annuities (fixed or variable)

Types of Life Insurance Used
  • Whole life
  • Term
  • Universal life
  • Variable universal life
  • No definite ruling on VUL use in DB plan

How Much Life Insurance Can Be Used?
  • Incidental benefit limitations
  • 100 times test
  • 50 of annual contribution for whole life
  • 25 of annual contribution for universal life or
  • Defined contribution plans
  • Seasoned money
  • Potentially, all employer funds that have been in
    the plan over two years can be used to purchase
    life insurance

Why Buy Life Insurance Inside Qualified Plan?
  • Self-completion
  • Pre-tax dollars
  • Portability

What if Life InsuranceIs Still Needed at
  • Receive policy as plan distribution
  • Purchase policy from the plan
  • Roll policy to profit sharing plan
  • New plan must allow for the purchase of life

Tax Implications
  • Employer contribution is tax-deductible
  • Death benefit in excess of cash value is
    received federal income taxfree
  • Participant recognizes economic benefit
  • Generally, policy proceeds are includable in the
    gross estate

Valuing the Life Insurance Policy
  • Rev. Proc. 2005-25
  • Guidance on fair market value
  • Two safe harbor formulas

Who Might Benefit from a Split-funded Defined
Benefit Plan?
  • Ideal candidates include
  • Highly paid business owners
  • Companies with few or no employees
  • Companies with many employees and multiple
  • Companies with existing 401(k)/profit sharing

Role of the Third-Party Administrator
  • Develops suitable defined benefit plan proposal
  • Assists in preparation of plan documents
  • Performs annual administration
  • Calculates plan contributions (including
    Actuarial Certification)
  • Prepares required reports
  • Handles distributions
  • Performs incidental benefits testing

Hypothetical Example 1 Surgical Practice
  • Doctor 700k salary
  • Wife 100k salary
  • 10 employees 627k total salary
  • Existing Profit Sharing Plan
  • Doctor 45k contribution
  • Wife 25k contribution
  • 10 Employees 151k contribution
  • PROBLEM The employee cost is twice that of the

Example 1 (continued)
  • Solution
  • Layer split-funded defined benefit plan on top
    of profit sharing plan
  • New contributions
  • Doctor 256k
  • Wife 92k
  • 10 Employees 151k NO CHANGE
  • 125k of contribution used to purchase Life

Calculations provided by Pension Quote
Example 1 (continued)
  • How?
  • Comparability Testing
  • Performed by TPA actuaries
  • 25 of salary for 10 employees was already
    being contributed
  • Percentage of salary required for contributions
    on behalf of rank and file employees can be
    different within limits

Calculations provided by Pension Quote
Example 2 Legal Eagle
  • Multi-partner law firm
  • 24 partners
  • 30 associates
  • 108 staff
  • Total contribution to existing profit
    sharing/401(k) plan 1,712,000
  • Total contributions for associates/staff
    632,000 (8 of companys associates/staff
  • Total contributions for partners 1,080,000
  • 63 of total contribution benefits the partners

Calculations provided by Pension Quote
Example 2 (continued)
  • Solution
  • Layer split-funded DB plan on existing plan
  • New contributions
  • Partners 3,552,000 . . . 2,472,000 increase
  • Employee contribution 632,000 . . . no increase

Calculations provided by Pension Quote
Split-Funded DB PlansSummary
  • Retirement income
  • Life insurance protection
  • Large tax-deductible contributions
  • Customizable

  • Transamerica Insurance Investment Group
    (Transamerica) and its representatives do not
    give tax or legal advice. This presentation is
    for informational purposes only and should not be
    construed as tax or legal advice. Clients and
    other interested parties must be urged to consult
    with and rely solely on their own independent
    advisors regarding the information and
    interpretations contained herein.
  • The information presented here does not take into
    consideration the applicable state laws of
    clients and prospects. Although care has been
    taken in preparing this material and presenting
    it accurately, Transamerica disclaims any
    implied or actual warranties as to the accuracy
    of any material contained herein and any
    liability with respect to it. The information in
    this presentation is current as of March 2010.
  • Transamerica Insurance Investment Group is
    registered with the National Association of
    State Boards of Accountancy (NASBA) as a sponsor
    of continuing professional education on the
    National Registry of CPE Sponsors. State boards
    of accountancy have final authority on the
    acceptance of individual courses for CPE credit.
    Complaints regarding registered sponsors may be
    addressed to the National Registry of CPE
    Sponsors, 150 Fourth Avenue North, Nashville, TN
    37219-2417. Telephone 615.880.4200. Web site
  • In the state of New York, Transamerica Life
    Insurance Company is an approved provider of
    continuing education courses (Provider
    Organization Approval Number NYPO-100366).

Life Insurance in Split-Funded Defined Benefit
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