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Insurance Abstract
A retirement plan is created using variable life insurance contracts
and/or variable annuity contracts. Actuarial data used to create
the retirement plan is entered via at least one user interface and
processed. Based on the actuarial data, a variable life insurance
policy and/or a variable annuity policy is generated for the purpose
of funding the retirement plan. Additionally, a separate agreement
is created that either extra-contractually modifies the variable
life insurance policy and/or the variable annuity policy, or defines
the terms under which the variable life insurance policy and/or
the variable annuity policy is to be used in the retirement plan.
Insurance Claims
1. A computer-implemented data-processing method for creating a
retirement plan funded using variable life insurance contracts,
the method comprising: (a) entering, via at least one user interface,
actuarial data used to create the retirement plan; (b) based on
the actuarial data, electronically generating a variable life insurance
policy; (c) funding the retirement plan using the variable life
insurance policy; (d) electronically generating a separate agreement
that defines the terms under which the variable life insurance policy
is to be used in the retirement plan, wherein the plan includes
the policy and the separate agreement; and (e) providing a guaranty
of the plan benefits using the plan's policy and separate agreement.
2. A computer-implemented data-processing method for creating a
retirement plan funded using variable annuity contracts, the method
comprising: (a) entering, via at least one user interface, actuarial
data used to create the retirement plan; (b) based on the actuarial
data, electronically generating a variable annuity policy; (c) funding
the retirement plan using the variable annuity policy; (d) electronically
generating a separate agreement that defines the terms under which
the variable annuity policy is to be used in the retirement plan,
wherein the plan includes the policy and the separate agreement;
and (e) providing a guaranty of the plan benefits using the plan's
policy and separate agreement.
3. A computer-implemented data-processing method for creating a
retirement plan funded using at least one of life insurance contracts
and annuity contracts, the method comprising: (a) entering, via
at least one user interface, actuarial data used to create the retirement
plan; (b) based on the actuarial data, electronically generating
at least one policy selected from the group including a life insurance
policy and an annuity policy; (c) funding the retirement plan using
the selected at least one policy; (d) electronically generating
a separate agreement that defines the terms under which the selected
at least one policy is to be used in the retirement plan, wherein
the plan includes the separate agreement and at least one of the
policies; and (e) providing a guaranty of the plan benefits using
the plan's separate agreement and at least one policy.
4. The method of claim 3, further comprising: (f) determining a
negotiated guaranteed rate of return for the retirement plan.
5. The method of claim 4, further comprising: (g) determining,
after a predetermined period of time, whether earnings based on
funds contributed to the retirement plan exceed the guaranteed rate
of return, and if so, setting an "actual earnings" parameter
to determine future contributions to the retirement plan.
6. The method of claim 3, wherein the life insurance policy is
a variable life insurance policy and the annuity policy is a variable
annuity policy.
7. The method of claim 3, further comprising: (f) electronically
generating a software illustration associated with the selected
at least one policy based on information received from at least
one remotely located processor that processed the actuarial data.
8. The method of claim 3, further comprising: (f) allocating funds
contributed to the retirement plan between a General Account and
a Variable Account.
9. A system for creating a retirement plan funded using variable
life insurance contracts, the system comprising: (a) at least one
user interface for entering actuarial data used to create the retirement
plan; and (b) at least one processor that receives the actuarial
data from the user interface and, in response, electronically generates
a retirement plan that includes: (i) a variable life insurance policy;
(ii) a source of funding for the retirement plan using the variable
life insurance policy; (iii) a separate agreement that defines the
terms under which the variable life insurance policy is to be used
in the retirement plan; and (iv) a guaranty of the plan benefits
using the plan's policy and separate agreement.
10. A system for creating a retirement plan funded using variable
annuity contracts, the system comprising: (a) at least one user
interface for entering actuarial data used to create the retirement
plan; and (b) at least one processor that receives the actuarial
data from the user interface and, in response, electronically generates
a retirement plan that includes: (i) a variable annuity policy;
(ii) a source of funding for the retirement plan using the variable
life insurance policy; (iii) a separate agreement that defines the
terms under which the variable annuity policy is to be used in the
retirement plan; and (iv) a guaranty of the plan benefits using
the plan's policy and separate agreement.
11. A system for creating a retirement plan funded using at least
one of life insurance contracts and annuity contracts, the system
comprising: (a) at least one user interface for entering actuarial
data used to create the retirement plan; and (b) at least one processor
that receives the actuarial data from the user interface and, in
response, electronically generates a retirement plan that includes:
(i) at least one policy, selected from the group including a life
insurance policy and an annuity policy; (ii) a source of funding
for the retirement plan using the selected at least one policy;
(iii) a separate agreement that defines the terms under which the
selected at least one policy is to be used in the retirement plan;
and (iv) a guaranty of the plan benefits using the plan's policy
and separate agreement.
12. The system of claim 11, wherein a negotiated guaranteed rate
of return is determined for the retirement plan by the processor.
13. The system of claim 12, wherein, after a predetermined period
of time, the processor determines whether earnings based on funds
contributed to the retirement plan exceed the guaranteed rate of
return, and if so, an "actual earnings" parameter is set
to determine future contributions to the retirement plan.
14. The system of claim 11, wherein the life insurance policy is
a variable life insurance policy and the annuity policy is a variable
annuity policy.
15. The system of claim 11, wherein the processor electronically
generates a software illustration associated with the selected policy
based on information received from at least one remotely located
processor that processed the actuarial data.
16. The system of claim 11, wherein funds contributed to the retirement
plan are allocated between a General Account and a Variable Account.
17. A computer-implemented data-processing method for creating
a retirement plan funded using at least one of life insurance contracts
and annuity contracts, the method comprising: (a) entering, via
at least one user interface, actuarial data used to create the retirement
plan; (b) based on the actuarial data, electronically generating
at least one policy selected from the group including a life insurance
policy and an annuity policy; (c) funding the retirement plan using
the selected at least one policy, wherein the plan includes the
at least one policy; and (d) allocating funds contributed to the
retirement plan between a General Account and a Variable Account
such that the allocation guarantees the plan benefits.
18. The method of claim 17, further comprising: (e) determining
a negotiated guaranteed rate of return for the retirement plan.
19. The method of claim 18, further comprising: (f) determining,
after a predetermined period of time, whether earnings based on
funds contributed to the retirement plan exceed the guaranteed rate
of return, and if so, setting an "actual earnings" parameter
to determine future contributions to the retirement plan.
20. The method of claim 17, wherein the life insurance policy is
a variable life insurance policy and the annuity policy is a variable
annuity policy.
21. The method of claim 17, further comprising: (e) electronically
generating a software illustration associated with the selected
policy based on information received from at least one remotely
located processor that processed the actuarial data.
22. A system for creating a retirement plan funded using at least
one of life insurance contracts and annuity contracts, the system
comprising: (a) at least one user interface for entering actuarial
data used to create the retirement plan; and (b) at least one processor
that receives the actuarial data from the user interface and, in
response, electronically generates a retirement plan that includes:
(i) at least one policy selected from the group including a life
insurance policy and an annuity policy; (ii) a source of funding
for the retirement plan using the selected at least one policy;
and (iii) an allocation of funds contributed to the retirement plan
between a General Account and a Variable Account such that the allocation
guarantees the plan benefits.
23. The system of claim 22, wherein a negotiated guaranteed rate
of return is determined for the retirement plan by the processor.
24. The system of claim 23, wherein, after a predetermined period
of time, the processor determines whether earnings based on funds
contributed to the retirement plan exceed the guaranteed rate of
return, and if so, an "actual earnings" parameter is set
to determine future contributions to the retirement plan.
25. The system of claim 22, wherein the life insurance policy is
a variable life insurance policy and the annuity policy is a variable
annuity policy.
26. The system of claim 22, wherein the processor electronically
generates a software illustration associated with the selected policy
based on information received from at least one remotely located
processor that processed the actuarial data.
27. The method of claim 1 wherein the retirement plan is a qualified
defined benefit pension plan.
28. The method of claim 2 wherein the retirement plan is a qualified
defined benefit pension plan.
29. The method of claim 3 wherein the retirement plan is a qualified
defined benefit pension plan.
30. The system of claim 9 wherein the retirement plan is a qualified
defined benefit pension plan.
31. The system of claim 10 wherein the retirement plan is a qualified
defined benefit pension plan.
32. The system of claim 11 wherein the retirement plan is a qualified
defined benefit pension plan.
33. The method of claim 17 wherein the retirement plan is a qualified
defined benefit pension plan.
34. The system of claim 22 wherein the retirement plan is a qualified
defined benefit pension plan.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] This application is a divisional of copending U.S. application
Ser. No. 10/086,924 filed Feb. 28, 2002, the entire disclosure of
which is incorporated herein by reference.
[0002] This application claims the benefit of U.S. Provisional
Application No. 60/296,173, filed Jun. 6, 2001, entitled "System
and Method for Creating a Defined Benefit Pension Plan Funded With
Variable Life Insurance and Generating a Policy Thereof."
BACKGROUND OF THE INVENTION
[0003] Internal Revenue Code Section 412(i) covers defined benefit
plans that are funded solely by annuity contracts and/or insurance
contracts, including retirement income endowment contracts. A defined
benefit plan is a retirement plan sponsored by an employer, such
as a pension plan, in which a retired employee receives a specific
monetary disbursement based on salary history and years of service,
or both. A 412(i) plan is a defined benefit plan wherein the funding
(annual contribution) is calculated under the rules of Code Section
412(i). It is also referred to as a fully-insured plan.
[0004] It is desirable to qualify a pension under Section 412(i)
because qualifying plans are exempt from the funding requirements
of Code Section 412. This includes exemptions from the minimum funding
standard account, the full funding limitation, quarterly contributions,
reasonable actuarial assumption interpretations, and the Schedule
B Enrolled Actuary certification that is otherwise required to be
filed with the Forms 5500 for the plan.
[0005] Generally, the requirements for qualification of a plan
as a 412(i) plan are:
[0006] (1) The plan must be funded exclusively with annuity contracts
or a combination of life insurance contracts and annuity contracts.
[0007] (2) The contracts must provide for level annual payments
to begin when an individual becomes a plan participant and extending
not later than the retirement date under the plan.
[0008] (3) The plan benefit must be provided entirely by the contracts
and guaranteed by an insurance carrier to the extent premiums have
been paid.
[0009] (4) Premiums payable for the plan year and all prior plan
years under such contracts must have been paid.
[0010] (5) No rights under the contracts may be subject to a security
interest during the plan year.
[0011] (6) No policy loans may be outstanding at any time during
the plan year.
[0012] Since the plan benefits must be guaranteed by the insurance
company that issues the life insurance contracts and the annuity
contracts, the plan's actuarial assumptions may be based on the
guaranteed values in the contracts. This means that the plan must
fund for benefits based on the guaranteed annuity conversion factors
in the contracts and must assume the pre-retirement interest assumption
that is guaranteed in the life insurance contracts and/or the annuity
contracts.
[0013] Traditional (prior art) 412(i) plans are constructed with
traditional whole life or fixed rate annuity policies to fund benefits.
Only whole life insurance has been used in a 412(i) plan because
State insurance laws require that a guaranteed dividend be earned
on such policies. Consequently, in the prior art, it was presumed
that the policy's guaranty constituted the only way for the insurance
company to satisfy the section 412(i) requirement that benefits
be guaranteed. Generally, although such contracts have a guaranteed
rate of return (usually 4.5% per annum or less), the potential upside
investment performance is very limited because of conservative investments
made by insurance companies. Limited upside performance has impaired
consumer demand for whole life contracts, in general; and this has
also impaired demand for 412(i) plans.
[0014] It would be advantageous to use a variable life insurance
policy and/or a variable annuity policy in a 412(i) plan to take
advantage of better tax treatment for the employer sponsoring the
plan, while at the same time being able to reap higher returns on
higher risk investment vehicles. However, the conventional belief
is that one cannot use a variable life insurance policy and/or a
variable annuity policy to fund a 412(i) defined benefit plan.
BRIEF SUMMARY OF THE INVENTION
[0015] The present invention is a method and system for using variable
life insurance contracts and/or variable annuity contracts to fund
a 412(i) defined benefit plan. The present invention enables variable
life insurance contracts in a pension plan to operate similar to
a traditional ordinary whole life insurance policy insofar as it
basically provides death benefit coverage for life in a stipulated
level amount as long as scheduled level premiums are paid as they
fall due.
[0016] In accordance with the present invention, a computer-implemented
data-processing scheme is used to create a defined benefit pension
plan funded using variable life insurance contracts and or variable
annuity contracts. Actuarial data (associated with an applicant
for insurance under the defined benefit pension plan) is entered
via at least one user interface. Based on the actuarial data, a
variable life insurance policy and/or a variable annuity policy,
and a separate agreement that extra-contractually modifies the variable
life insurance policy and/or the variable annuity policy are electronically
generated.
[0017] In accordance with another embodiment of the present invention,
a computer-implemented data-processing scheme is used to create
a defined benefit pension plan funded using variable life insurance
contracts and or variable annuity contracts. Actuarial data (associated
with an applicant for insurance under the defined benefit pension
plan) is entered via at least one user interface. Based on the actuarial
data, a variable life insurance policy and/or a variable annuity
policy, and a separate agreement that defines the terms under which
the variable life insurance policy and/or a variable annuity policy
is to be used in the defined benefit pension plan are electronically
generated.
[0018] In accordance with yet another embodiment of the present
invention, a computer-implemented data-processing scheme is used
to create a defined benefit pension plan funded using at least one
of life insurance contracts and annuity contracts. Actuarial data
is entered via at least one user interface, and is used to create
the defined benefit pension plan. Based on the actuarial data, a
life insurance policy and/or an annuity policy used to fund the
defined benefit pension plan is electronically generated. Furthermore,
a separate agreement that extra-contractually modifies the life
insurance policy and/or an annuity policy is electronically generated.
[0019] A guaranteed rate of return may be determined for the defined
benefit pension plan as a result of negotiations between a plan
sponsor and the issuer of contracts used to fund the plan. After
a predetermined period of time, it may be determined whether earnings
based on funds contributed to the defined benefit pension plan exceed
the guaranteed rate of return. If so, an "actual earnings"
parameter may be set to determine future contributions to the defined
benefit pension plan. The life insurance policy may be a variable
life insurance policy and the annuity policy may be a variable annuity
policy. A software illustration associated with the selected policy
may be electronically generated based on information received from
at least one remotely located processor that processed the actuarial
data. The defined benefit pension plan may be a variable 412(i)
defined benefit pension plan which includes the selected policy
and the separate agreement. Funds contributed to the defined benefit
pension plan are allocated between a General Account and a Variable
Account.
[0020] In accordance with yet another embodiment of the present
invention, a computer-implemented data-processing scheme is used
to create a defined benefit pension plan funded using at least one
of life insurance contracts and annuity contracts. Actuarial data
is entered via at least one user interface, and is used to create
the defined benefit pension plan. Based on the actuarial data, a
life insurance policy and/or an annuity policy used to fund the
defined benefit pension plan is electronically generated. Furthermore,
a separate agreement that defines the terms under which the life
insurance policy and/or the annuity policy is to be used in the
defined benefit pension plan is electronically generated.
BRIEF DESCRIPTION OF THE SEVERAL VIEWS OF THE DRAWING
[0021] The following detailed description of preferred embodiments
of the invention, will be better understood when read in conjunction
with the appended drawings. For the purpose of illustrating the
invention, there are shown in the drawings embodiments which are
presently preferred. It should be understood, however, that the
invention is not limited to the precise arrangements and instrumentalities
shown. In the drawings:
[0022] FIG. 1 shows a system architecture diagram according to
the present invention;
[0023] FIGS. 2A, 2B and 2C, taken together, show a flow chart according
to the present invention; and
[0024] FIG. 3 shows a simplified scheme of creating a defined benefit
pension plan in accordance with a preferred embodiment of the present
invention.
DETAILED DESCRIPTION OF THE INVENTION
[0025] I. Overview of the Present Invention
[0026] The present invention provides a mechanism to avoid violation
of the "incidental benefit rule," an Internal Revenue
Service rule that denies qualified treatment to a defined benefit
plan which provides life insurance in other than incidental amounts.
The present invention does this by negating a policy option that
may be ordinarily elected by a participant covered by the policy
or plan fiduciary, under which the excess (if any) of the policy's
cash value over the "tabular cash value" (essentially
the net level premium reserve on a regular whole life policy having
the same face amount and the same net premium as the policy) is
added to the policy's face amount, with the total becoming the death
benefit payable under the policy.
[0027] The present invention differs from a process based upon
traditional ordinary whole life insurance policy only in that the
policy employed in the process generally does not contain guaranteed
(i.e., contractual) cash values with respect to amounts allocated
to the variable account within the policy, itself. However, the
present invention achieves the same effect by virtue of supplemental
contractual provisions that either modify the obligations of the
insurance company to the plan and the plan's participants or combine
existing policies and riders to achieve the same end. Further, the
present invention permits, in addition to the level premium payment
schedule under the Policy, the payment of extra unscheduled premiums
to the Policy, where such extra premiums do not directly affect
the death benefit amount, but instead are allocated directly to
the cash value, which can affect the death benefit but not to a
significant degree.
[0028] In general, an insurance policy may be deemed to be ordinary
whole life insurance for the purpose of applying IRS Revenue Ruling
54-51 if, by the terms of the policy, (1) the amount of the death
benefit may not decrease, and (2) the contractual premium may not
increase during the period which is the lesser of the lifetime of
the participant or the time the policy remains in force. The variable
412(i) process described herein may be implemented using "off-the-shelf"
variable contracts, as long as the investment vehicles of the variable
life insurance policy comply with the requirements of the plan agreement.
The variable 412(i) process permits use of "private placement"
variable contracts, thus enabling insurance companies to link the
newest developments in insurance design to the pension market. Use
of variable contracts will make 412(i) plans more competitive against
non-insured pension plans in the marketplace because investors will
not have to compromise investment performance. Since the Internal
Revenue Service has previously held that Revenue Ruling 54-51 appears
to support the ideology that variable life insurance is a form of
whole life insurance, such insurance can be implemented into a 412(i)
defined benefit plan. The present invention uses "illustration
software" to determine a life insurance and annuity premium
which collectively comprise the annual contribution to the plan.
[0029] Present government regulations allow an insurance company
and plan fiduciary to extra-contractually modify life insurance
policies. Under Section 1.412(i)-1(b)(2)(ii) of the Internal Revenue
Code, any policy may be supplemented by a separate agreement between
the Plan and the Insurer in order to comply with the requirements
of section 412(i). The present invention requires the creation of
a new, specialized contract which operates as a modification to
the terms of the Insurer's life insurance policy and/or annuity
policy when used in the context of a section 412(i) plan. This is
an important feature of the present invention, in part, because
it allows the Plan to be offered without requiring the Insurer to
obtain special approval of the life insurance contracts and/or the
annuity contracts from various State insurance regulators to reflect
the terms of certain extra-contractual modifications comprising
part of the present invention. Moreover, because of the aforesaid
regulations, the extra-contractual modifications appear to require
no additional approval from the IRS, provided that the modifications
reflect the regulations.
[0030] Another significant element of the present invention is
the process by which the Insurer is able to guaranty the plan benefits.
The present invention contemplates that the variable 412(i) process
will utilize one or more different methods for hedging the uncertain
rate of return inherent in a variable product against the guaranteed
rate of return contemplated in a 412(i) plan. The hedging methods
utilized to minimize risk to the insurance carrier include:
[0031] (1) Allocating contributed funds between a General Account
(e.g., 25%) and a Variable Account (e.g., 75%) to reduce the effective
guaranty against the variable portion, because the general account
has a guaranteed rate of return (e.g., 4%). Thus, the plan fiduciary
may devote a percentage of plan contributions to the variable subaccounts
of the variable life insurance contracts and/or variable annuity
contracts (between 0% and 100%) to increase the probability of higher
investment performance while significantly reducing the effective
guaranty risk suffered by the insurance company.
[0032] (2) Internal investment of insurance companies may be hedged
to account for risk related to the guaranty on the variable policy
in the 412(i) plan.
[0033] (3) The insurance company can charge higher mortality rates
and/or expense charges for policies used in the variable 412(i)
plan.
[0034] (4) Commissions payable to agents for the policies used
in the variable 412(i) plan may be decreased.
[0035] (5) Allocating contributed funds among equity, bond, money
market or other components of available variable subaccounts, without
the necessity for the allocation to the General Account; e.g., 50%
equities, 30% bonds, and 20% money market.
[0036] (6) Hedging may also be implemented with a "guaranteed
income rider" (if the company has it available) in order to
provide a guaranteed rate of return for the variable annuity and/or
the variable life insurance portion of the 412(i) funding.
[0037] (7) Rather than allocation to the general fund in the variable
contract (method (1) above), a percentage of the allocation can
be made to life insurance contracts and/or annuity contracts with
guaranteed minimum rates of return, while the remainder of the contribution
can be invested in variable contracts.
[0038] (8) The guaranty of the insurer may also be provided through
reinsurance or a contract of indemnity, guaranty or suretyship.
[0039] In some of the hedging methods contemplated by the present
invention, the insurance company may indicate that in order to receive
a particular guaranteed return, the participants' funds must be
invested among various accounts; e.g., 25% in a guaranteed account,
40% in any variable subaccount, and 35% in a particular subaccount.
[0040] The advantages of such a plan include that no planned fee
is charged for actuarial certification by an Enrolled Actuary, fiduciary
risks are reduced, and the lower the actuarial assumption, the greater
the probability of a higher long-term rate of return because of
accelerated income tax benefits.
[0041] In a computer-implemented method for drafting a section
412(i) plan agreement, the method steps include: [0042] (1) Select
an insurance company through which a policy is to be employed.
[0043] (2) Obtain a guaranteed amount for the policy, including
the rate of the return the insurance company guarantees on invested
funds.
[0044] (3) Determine the allowable deduction.
[0045] (4) Determine the maximum premium to spend on insurance.
[0046] In accordance with the present invention, the variable 412(i)
process is constructed with variable life insurance and/or variable
annuity products, a plan design feature not previously available
in the market. Variable contracts have emerged as the product of
choice among consumers. Variable contracts offer substantially increased
upside investment potential over traditional whole-life contracts,
because of the ability to allocate cash invested in the insurance
contract to various mutual fund sub-accounts.
[0047] Traditional 412(i) plans measure tax deductions by reference
to the insurance company's guaranteed rate. At a typical 4% guaranty,
the maximum deduction for a 55 year old male retiring at age 65
is approximately $170,000 per year. While this deduction is substantially
higher than a non-fully-insured defined benefit plan, the transaction
is heavily weighted toward tax considerations instead of long-term
economics.
[0048] Variable 412(i) plans measure tax deductions by reference
to a negotiated guaranteed rate. At a negotiated 2.5% guaranty,
the maximum deduction for a 55-year-old male retiring at age 65
is approximately $270,000 per year (in 2001). The tax deduction
potential for variable 412(i) is substantially higher than a non-fully-insured
defined benefit plan and traditional 412(i) plans. While the arrangement
maintains considerable tax advantages (due to accelerated deductions),
variable contracts reduce the compromises of long-term economics
one normally sees in a pension plan funded with insurance products.
[0049] More product sales within plans for insurance companies
may occur because the present invention makes 412(i) plans much
more competitive with traditional plans funded with securities.
A more competitive product leads to greater sales. Multiple product
sales may occur due to the offering of variable life insurance and
annuities. Since the Internal Revenue Service has ruled that only
50% of the contribution to a plan can be for "whole life"
insurance, approximately half of the plan contribution will normally
be used to purchase annuity contracts. The larger potential market
and deductions (as compared to plans without the present invention)
may lead to increases in sales of both insurance and annuity products.
[0050] The present invention is a significant positive change to
the process of insured pension plan implementation. Users of the
present invention will be able to claim market ingenuity and leadership,
resulting in increased goodwill and sales.
II. Detailed Disclosure
[0051] To implement the present invention, a system and method
for presenting a defined benefit pension plan funded with variable
life insurance contracts and/or variable annuity contracts and generating
a policy thereof will now be disclosed. In accordance with the present
invention, the participant or plan fiduciary is given the option
of allocating any portion of the plan's Accumulation Value to a
"Variable Account." The Variable Account is an account
designated by the plan to hold the net premiums and Accumulation
Value under the plan to support variable life insurance benefits.
The Variable Account is an account designated by the plan which
is not part of a "General Account" and is designed primarily
for investment in mutual funds (sub-accounts) which invest primarily
in stocks and other types of debt and equity securities. The Variable
Account may also be referred to in some cases to as a "Separate
Account." The General Account is an account designated by the
plan to hold the net premiums and Accumulation Value under the plan
which are not designated for investment in the Variable Account.
The General Account may also be referred to in some cases as the
"Fixed Account" and is part of the assets of the Insurance
Company.
[0052] The rate of return of the General Account is guaranteed
by the insurance company, as per State regulations. Using the present
invention, anywhere from 0% to 100% of premiums may be invested
in the General Account. Also, using the present invention, anywhere
from 0% to 100% of the premiums may be invested in the Variable
Account. Under normal circumstances, it would not be expected that
an insurance company would permit the plan sponsor to allocate more
than 75% of the premiums (plan contributions) to the Variable Account.
However, the present invention provides total flexibility to the
insurance company and plan sponsor to modify the allocation by agreement,
as outlined above. Furthermore, the structure agreed to between
the plan and the Insurer may involve the purchase of a standard
guaranteed policy as well as a variable policy, with no restrictions
on the allocations in the variable policy.
[0053] FIG. 1 shows a system architecture diagram of a computer
system 100 in accordance with the present invention. In the computer
system 100, a computer 101, which may be simply a personal computer
(PC), is connected to a printer 102. Computer 101 serves as a user
interface for entering actuarial data associated with an applicant
to a defined benefit pension plan. The computer 101 is also coupled
via a computer-to-computer communication device, such as, for example,
a modem 105, to computer systems of a plurality of insurance carriers
103, 104. Printer 102 is used to print out policy software illustrations
and plan agreements. The computer system 100 may be used by a defined
benefit pension plan representative, an employer representative
or an insurance broker to generate plan presentations and plan agreement
policies, and obtain quotes from different insurance companies in
accordance with the present invention. The computer system 100 may
also be used by an applicant who is looking for direct information
from the insurance companies via the World Wide Web (e.g., the Internet).
[0054] Referring now to FIG. 2A, personal information (actuarial
data) associated with participants to a defined benefit pension
plan is inputted into computer 101 (step 205). The personal information
includes basic information such as the date of birth of an individual
plan participant (used to determine age), whether the individual
plan participant is a smoker or non-smoker, whether the individual
plan participant is a male or female, etc. Next, data associated
with the intended benefits under the defined benefit pension plan
is entered into computer 101 or at a different user interface (step
210). The benefit data includes retirement goal and desired death
benefit information associated with a life insurance policy and/or
an annuity policy incorporated into the plan.
[0055] In accordance with the present invention, the plan fiduciary
or sponsor is queried as to whether a Variable Account plan option
is desired (step 215). The query may be a blank space on a plan
application that needs to be filled in, or the query may be presented
in the form of a text or audible question presented over an electronic
medium. The query may be answered by a third party (e.g., a plan
representative or insurance agent) who has been in physical and/or
audible contact with the plan participant. If the Variable Account
option is desired, the participant's information and a query for
plan information based on the Variable Account option is sent to
insurance companies 103, 104 (step 220). If the Variable Account
option is not desired, the participant's information and a query
for plan information based on the General Account being funded at
a 100% level is sent to insurance companies 103, 104 (step 230).
[0056] Referring now to FIG. 2B, in response to step 220, each
insurance company that has a Variable Account option available,
determines a guaranteed rate of return by reference to an insurance
contract fixed account, or other insurance company promise in a
policy, rider or agreement (step 235). The plan sponsor selects
an insurance company whose products are intended to be used in conjunction
with the plan. Software provided by the selected insurance company
is used for computations. The insurance company software, after
considering the inputted benefit data and actuarial data, renders
an annual premium amount necessary to fund the benefits contemplated
for each participant (step 240). This, in turn, forms the basis
for an allowable income tax deduction for the plan (step 245). A
policy software illustration and an actual policy based on the Variable
Account option are printed out on printer 102 (step 250). If the
premium, coverage, and benefits to be generated by the annuity and/or
life insurance policies are acceptable, the plan sponsor will choose
the insurance company to provide the coverage and benefits (step
255). The applications for coverage are signed and forwarded to
the insurance company. If the applications are not accepted by the
insurance company, applications will be made with other insurance
companies until they are accepted. When coverage is offered, the
plan fiduciary or sponsor then accepts the offer of coverage from
the insurance company, signs necessary policy documentation, and
forwards each to the insurance company along with the necessary
premiums. Once the accepting insurance company receives the premiums
(step 260), funds drawn from the premium are allocated to the Variable
and General Accounts as determined by the agreement between the
insurance company and the plan sponsor (step 265). After a predetermined
period of time (preferably one year), a determination is made as
to whether earnings based on the funds exceed the guaranteed rate
of return (step 270). If so, then the earnings of the plan are set
to "actual earnings" (step 275). If not, then corrective
action may be taken by the insurance company (step 280). Such corrective
action may include asset re-allocation, internal hedging of the
insurance company's investments, increased mortality charges or
expense charges, or by making a mandatory request to the plan fiduciary
to allocate the Variable Account into a plurality of sub-accounts
in a manner determined by the insurance company.
[0057] Referring now to FIG. 2C, in response to step 230, each
insurance company that has a General Account option available, determines
a guaranteed rate of return (step 235'). The plan sponsor selects
an insurance company. Software provided by the selected insurance
company is used for computations. The insurance company software,
after considering the inputted benefit data and actuarial data,
renders an annual premium amount necessary to fund the benefits
contemplated for each participant (step 240'). This, in turn, forms
the basis for an allowable income tax deduction for the plan (step
245'). A policy software illustration and an actual policy based
on the General Account option are printed out on printer 102 (step
250'). If the premium, coverage, and benefits are acceptable, the
plan sponsor will choose the insurance company to provide the coverage
and benefits (step 255'). Once the accepting insurance company receives
the premiums from the plan (step 260'), funds drawn from the premium
are 100% allocated to the General Account (step 265').
[0058] FIG. 3 shows a simplified scheme of creating a defined benefit
pension plan funded using life insurance contracts and/or annuity
contracts in accordance with a preferred embodiment of the present
invention. As previously described, actuarial data is entered into
a user interface (step 305) (e.g., see computer 101 in FIG. 1).
Based on the actuarial data, and data related to the benefits of
the defined benefit pension plan that is to be created (e.g., plan
design data), one or more policies used to fund the defined benefit
pension plan are electronically created by at least one processor
(step 310). The policies include a life insurance policy and/or
an annuity policy. The life insurance policy may be a variable life
insurance policy. The annuity policy may be a variable annuity policy.
A separate agreement is also electronically generated (step 315).
The separate agreement either extra-contractually modifies the selected
policy, or it defines the terms under which the selected policy
is to be used in the defined benefit pension plan. Thus, a defined
pension benefit plan is created that includes at least one of a
life insurance policy and/or an annuity policy, and the separate
agreement.
[0059] Many of the steps described above may be performed by a
plan representative, insurance agent, or plan provider prior to
the time in which a specific plan applicant requests a policy. For
example, a table of data (i.e., generated by policy illustration
software) may be pre-generated showing costs, premiums, and the
like, for a plurality of different potential plan applicants and
policy details.
[0060] The present invention is further explained in Appendices
A and B which contain the following contents:
[0061] Appendix A is an example of a Section 412(i) Plan Agreement
in accordance with the present invention. In this example, the guaranty
is 2.5%, and the Insurer may require that at least 25% of available
funds be allocated to the General Account and no more than 75% of
available funds shall be allocated to the Variable Account. The
Section 412(i) Plan Agreement (and modifications thereof contemplated
by the present invention) is an integral component of the present
invention, itself being generated by entry of the data into a computer
word processing program that produces the agreement on a printer.
[0062] Appendix B is a copy of Letter Ruling 9014068 (1990) based
on IRS Code Section 401 describing an ordinary whole life insurance
policy within the meaning of IRS Revenue Ruling 54-51. Although
Appendix B is directed towards the funding of a defined benefit
pension plan using a life insurance policy, it should be understood
that in an alternate embodiment, a variable annuity policy may also
be used to fund a defined benefit pension plan in accordance with
the present invention
[0063] The present invention may be implemented with any combination
of hardware and software. If implemented as a computer-implemented
apparatus, the present invention is implemented using means for
performing all of the steps and functions described above.
[0064] The present invention can be included in an article of manufacture
(e.g., one or more computer program products) having, for instance,
computer useable media. The media has embodied therein, for instance,
computer readable program code means for providing and facilitating
the mechanisms of the present invention. The article of manufacture
can be included as part of a computer system or sold separately.
[0065] It will be appreciated by those skilled in the art that
changes could be made to the embodiments described above without
departing from the broad inventive concept thereof. It is understood,
therefore, that this invention is not limited to the particular
embodiments disclosed, but it is intended to cover modifications
within the spirit and scope of the present invention, including
the use of any variable insurance contracts and/or variable annuity
contracts to fund a defined benefit plan or annuity plan. In the
present invention and appended claims, the term "variable insurance
contract" includes a life insurance contract or annuity contract
which permits fixed or flexible premiums and/or fixed or flexible
death benefits in its form as filed with an appropriate insurance
authority (also known as "Universal" contracts).
APPENDIX A
Section 412(i) Plan Agreement
[0066] AGREEMENT made this ______ day of ______, 2001 by and between
______ (hereinafter referred to as "Sponsor") and ______
Insurance Company (hereinafter referred to as the "Insurer").
BACKGROUND
[0067] A. Sponsor has developed a fully-insured pension plan program
(the "Plan") which is designed to comply with section
412(i) of the Internal Revenue Code of 1986, as amended ("Code")
and other applicable provisions of the Code and the Employee Retirement
Income Security Act of 1976, as amended ("ERISA"); and
[0068] B. Sponsor desires to offer the Plan to various employers
throughout the United States who wish to offer pension benefits
to employees of such employers; and [0069] C. Sponsor desires to
use certain variable life insurance policies (the "Policies")
of Insurer, both of the retail and private-placement variety, as
the funding medium for the benefits to be provided under the Plan;
and [0070] D. The Policies may not contain each and every characteristic
required by the Code and Treasury Regulations interpreting section
412(i); and [0071] E. Reg. Section 1.412(i)-1(b)(2)(ii) provides
that any Policy may be supplemented by a separate agreement between
the Plan and the Insurer in order to comply with the requirements
of section 412(i); and [0072] F. Insurer desires that its Policies
be used in the Plan and that the terms and conditions set forth
in this Agreement shall operate to supplement the terms and conditions
of the Policies solely for the purposes of the legal relationships
established under the Plan.
[0073] NOW THEREFORE, in consideration of the premises and the
mutual promises contained herein, and intending to be legally bound,
the parties agree as follows:
Operational Provisions
[0074] 1. Incorporation of Background. The foregoing Background
paragraphs are incorporated by reference as if set forth in full.
[0075] 2. Agreement by Insurer to Terms. The Insurer, desiring
that its Policies be used in the Plan, agrees that any such Policy
used in the Plan shall be governed by the terms of this Agreement,
notwithstanding any inconsistent provision contained in the terms
of each Policy.
[0076] 3. Section 412(i) Funding Requirements. [0077] a. Level
Funding. Premium payments for each Policy shall be made in a level
amount, paid annually or more frequently. [0078] b. Funding Period.
Premium payments shall be designed to [0079] i. begin on the date
an individual participant becomes a participant, and [0080] ii.
end not later than the normal retirement age (as defined in the
Plan) for such individual or, if earlier, the date the individual
ceases his participation in the plan. [0081] c. Experience gains
and dividends. Experience gains, dividends, and other credits shall
be applied against premiums next due under the Policy (not later
than the due date for same) before any further contributions made
by an employer are so applied, and the application of same to payment
shall not be deemed to violate the level funding requirement of
paragraph 3(a). [0082] d. Increased benefits. If benefits under
the Plan are increased, any increase in premium payment attributable
to such increased benefits shall be levelized prospectively within
the allowable funding period beginning on the first payment date
under the Policy occurring after the individual becomes a participant
or the date of the benefit increase, whichever is applicable. [0083]
e. Extended participation. If an individual accrues benefits after
his normal retirement age, payments under the Policy shall be permitted
during the time such benefits accrue.
[0084] 4. Guarantee of Benefits. For purposes of calculating benefits
under the Plan attributable to each Policy, the Insurer agrees to
the following provisions to the extent premiums have been paid.
[0085] a. Minimum Rate of Return if Variable Account chosen. If
the Owner of the Policy chooses to allocate any portion of the Policy's
Accumulation Value to a Variable Account, this paragraph shall govern
the minimum benefits under the Policy, as follows: [0086] i. The
Insurer agrees to guaranty benefits based upon a rate of return
under each Policy equal to two and one-half percent (2.50%) per
annum (the "Guaranteed Rate"). [0087] ii. If, however,
the earnings attributable to each Policy in a given year under the
Insurer's customary method of calculating Policy earnings ("Actual
Earnings") shall exceed the Guaranteed Rate, such earnings
under the Policy for the policy year shall be the Actual Earnings.
[0088] b. Required Fund Allocations. As a condition of the Minimum
Rate of Return, the Insurer may require that funds within each Policy
be allocated in a particular manner among the types of mutual funds
available as investment choices within each Policy. For purposes
of this paragraph, the insurer may require that at least 25% of
available funds be allocated to the General Account and no more
than 75% of available funds shall be allocated to the Variable Account.
[0089] c. If 100% of the Policy's Accumulation Value is in the General
Account, the provisions in the Policy governing such event shall
supercede the provisions in paragraphs a. and b. hereof. [0090]
d. Settlement Option. The Insurer guaranties that each Policy may
be exchanged for a single-life annuity or joint-and-survivor annuity,
as the case may be, at such time as benefits under the Plan are
to commence for each eligible participant; and the Insurer further
guaranties the payment of each such annuity on terms no less favorable
than those available for any other policy of the Insurer. [0091]
e. Definitions. For purposes of this paragraph, the following definitions
shall apply to the terms used herein. [0092] i. General Account--the
account designated by the Policy to hold the net premiums and Accumulation
Value under the Policy which are not designated for investment in
a Variable Account. The General Account is referred to in some cases
as the "Fixed Account" (depending on the Policy) and is
part of the assets of the Insurer. [0093] ii. Variable Account--the
account (and its component subaccounts) designated by the Policy
to hold the net premiums and Accumulation Value under the policy
to support variable life insurance benefits. Regardless of the name
by which it is called, the Variable Account is the part of the Policy
which is not part of the General Account and is designed primarily
for investment in mutual funds (subaccounts) which invest primarily
in stocks and other types of debt and equity securities. The Variable
Account is referred to in some cases as the "Separate Account"
(depending on the Policy). [0094] The Insurer shall notify the Policyholder
in advance of its classification of each type of Account and shall
make such classifications on the basis of standards customarily
employed in the insurance and investment industries. [0095] f. Death
Benefit Options. The Owner shall not have the ability to increase
death benefits pursuant to any provisions in the Policy commonly
referred to as "Option 2" or "Option B" or otherwise
so as to cause noncompliance with the "incidental benefit rule"
as articulated in Treas. Reg. .sctn.1.401-1 (b)(1)(i) and the Revenue
Rulings and other authority interpreting same.
[0096] 5. Security Interests. No rights under any Policy may be
subjected to a security interest of whatever nature.
[0097] 6. Policy Loans. No loans shall be available to the Plan
or any individual participant from cash surrender values contained
within a Policy. Notwithstanding the foregoing, the Insurer may
apply Policy values to pay premiums which come due so long as the
amount of funds so applied, and any interest thereon, is repaid
during the plan year in which such funds are applied and before
distribution is made or benefits commence to any participant whose
benefits are reduced because of such application.
[0098] 7. Exclusive benefit. No value under any Policy providing
benefits under the Plan or credits determined by the Insurer (on
account of dividends, earnings or other experience rating credits,
or surrender or cancellation credits) with respect to such policies
may be paid or returned to the Employer or diverted to or used for
other than providing retirement annuities for the exclusive benefit
of Plan participants or their beneficiaries.
[0099] 8. Mistake of fact contributions. Any contributions received
by the Insurer because of a mistake of fact must, after certification
of same by Sponsor, be returned to the Employer within one year
of the contribution.
[0100] 9. Distributed contracts. Any credits on account of dividends,
earning or other experience rating credits, or surrender or cancellation
credits, in excess of Plan benefits with respect to policies distributed
to provide plan benefits, will be applied consistent with paragraph
4c, above.
[0101] 10. Post-termination accruals. If upon the cessation of
benefit accruals or upon Plan termination, all benefits provided
under the Plan have been purchased with respect to service before
cessation of benefit accruals or termination, any credits on account
of dividends, earnings or other experience rating credits, or surrender
or cancellation credits with respect to policies under the Plan
shall revert to the Employer or be otherwise applied consistent
with the terms of the Plan.
[0102] 11. Proportionality of credits to Policies. Where credits
are applied by the Insurer before Employer contributions are made
such that the sum of the credits and contributions are sufficient
to pay premiums next due, such credits shall be applied proportionately
toward each premium next due so that the same percentage of each
premium next due is paid.
[0103] 12. Representations of Insurer. The insurer represents and
warrants that its Policy has the following characteristics: [0104]
a. The policy has a specified level face amount (or can be illustrated
with a specified level face amount for use in the Plan). [0105]
b. Both the coverage period and the premium payment period extend
from the issue of the Policy to the earlier of the insured's death
or the attainment of age ______. [0106] c. The policy gives the
owner the right to direct that the cash value (consisting of the
accumulation of past and current net premiums together with interest
thereon) be invested in a Variable Account (consisting of various
mutual fund portfolios chosen by insurer as available subaccounts)
or in a General Account of the Insurer. [0107] d. The cash value
of the Policy will vary in accordance with the investment experience
of the components of the Variable Account, and is not guaranteed
as to amounts in the Variable Account except as otherwise provided
herein. [0108] e. The death benefit under the Policy cannot fall
below the aforementioned face amount so long as the premiums are
paid in the amount and at the times specified in the Policy. [0109]
f. The death benefit under the Policy can increase or decrease the
face amount to the extent necessary to satisfy section 7702 of the
Code. [0110] g. The Policy may contain a provision commonly referred
to as "Option 2" or "Option B" (which, generally,
adds cash value to the death benefit), however the Policy used in
connection with the Plan will be illustrated and operated without
reference to same. [0111] h. The Policy contains a settlement option
which will permit payment of a single-life or joint and survivor
annuity at the normal retirement age of the insured. [0112] i. The
Insurer is licensed under the law of a State of the United States
of America or District of Columbia to do business with the Plan.
[0113] 13. ERISA Pre-emption. The parties are entering into this
agreement based upon the good faith understanding that these provisions
are "affecting an employee benefit plan" described in
ERISA section 3(2) and Code Section 412(i) by virtue of the mandates
contained in Code section 412(h)(2) added by section 1013(a) of
the Employee Retirement Income Security Act of 1974 (88 Stat. 914);
and these provisions are, therefore, pre-empted from state regulation
by operation of ERISA section 514.
[0114] 14. Fiduciary Responsibility. [0115] a. Except to the extent
that the Insurer holds Plan assets in the form of insurance or annuity
contracts, and to the extent not inconsistent with ERISA, the patties
acknowledge that Insurer is simply a provider of product for the
Plan and shall have no liability with respect to operation of the
Plan or any tax issues arising in connection therewith. [0116] b.
Insurer's obligations to provide Plan benefits are expressly limited
to the value of each Policy and annuity contracts purchased by the
Plan Trustee or Administrator for the provision of benefits. [0117]
c. Sponsor represents and warrants that each employer who adopts
a Plan funded with a Policy of the Insurer shall execute such documentation
as necessary to confirm employer's acknowledgment of Insurer's limited
responsibility with respect to the Plan.
[0118] 15. Duration. Except as otherwise provided herein, this
Agreement shall continue with respect to Policies purchased by a
Plan until such time as such Policies are surrendered by the Plan
or benefits are paid. Insurer may discontinue its participation
in the aforesaid section 412(i) program, and cease issuing policies
subject to this agreement, effective sixty (60) days after delivery
of written notice to Sponsor. Upon such termination, Insurer shall,
at its expense, immediately deliver to Sponsor all materials, whether
in written or electronic format, tangible or intangible, having
any reference whatsoever to pension plans funded with variable life
insurance, variable annuities, or private placement life insurance
and cease any business in connection with same.
[0119] 16. Intellectual Property. The parties agree and acknowledge
that the business process contemplated and permitted pursuant to
this agreement is the intellectual property and confidential information
of ______, his heirs, personal representatives, successors and assigns.
The parties are on notice of ______'s application or intention to
make application for patent protection with respect to the business
processes described or alluded to herein. By virtue of this agreement,
the parties agree that this agreement and the business process (of
creating a method for variable life insurance contracts to be used
in a pension plan) revealed hereunder is confidential and proprietary
and shall not be used in any way by any party hereto, their successors,
officers, employees, directors, agents, creditors, partners, shareholders,
fiduciaries, or assigns, or revealed to any person or entity without
the express written consent of ______. The parties agree to legal
and/or equitable relief to enforce this agreement, regardless of
the existence of a remedy at law, and consent to venue and personal
jurisdiction in the Court of Common Pleas of ______ or such other
court in the chosen by ______, and waive any right to removal. Because
of the difficulty in measuring damages, the parties agree that ______
shall be entitled to liquidated damages of $ ______ per violation
of this agreement, plus reasonable attorney fees, expenses of litigation,
and costs of suit. Without limiting the generality of the foregoing,
each use of the aforesaid business process in connection with marketing
or implementing a retirement plan, and each document in which such
unauthorized use appears, without the permission of ______, regardless
of the number, shall be a separate violation. In any action hereunder;
the parties irrevocably authorize any attorney of any court of record
or prothonotary to appear for such party in violation and to confess
or enter judgment by confession for all amounts allowed hereunder,
including statutory interest, in favor of ______, upon presentation
of an affidavit of default and damages and a copy of this agreement.
The right to enter judgment by confession granted hereunder shall
not be exhausted by any single exercise, but judgment may be confessed
as aforesaid from time to time and as often as amounts due hereunder
shall become due, and shall survive any oral or written modification
to this agreement. The parties agree to service of process by certified
mail addressed to the address for a party set forth herein or to
such other address provided by a party in writing to the other.
This provision shall survive indefinitely to the benefit of ______,
his heirs, personal representatives, successors and assigns, regardless
of any cancellation or modification of this agreement or the failure
of any party to execute same.
[0120] 17. Integration. This Agreement represents the sole agreement
of the parties with respect to the subject mailer hereof, superceding
any and all prior written or oral agreements. This Agreement may
be amended only by a writing executed by the parties.
[0121] 18. Choice of Law. This Agreement shall be interpreted and
adjudicated consistent with the laws of the ______, without giving
application to principles of conflict of laws, except to the extent
such law may be preempted by federal law. Issues of jurisdiction,
venue, remedy and service of process shall be governed in the same
fashion as set forth in paragraph 16. The parties acknowledge that
the foregoing are material components to this agreement and waive
objection to venue on the basis of forum non-conveniens or any similar
theory.
[0122] 19. Parties bound. This Agreement shall inure to the benefit
of and bind the parties hereto, their affiliates, joint venturers,
partners, subsidiaries, independent contractors, agents, creditors,
employees, directors, shareholders, heirs, personal representatives,
successors, and assigns, as the case may be.
[0123] 20. Interpretation. In construing this Agreement, the parties
intend that the singular shall include the plural, references to
male gender shall include female, and that technical terms relating
to policies shall have the meanings commonly employed in the insurance
and securities industries.
[0124] 21. Copies and Counterparts. [0125] a. This Agreement may
be executed in any number of counterparts, the collection of which
shall form the whole of the Agreement. [0126] b. The parties shall
be entitled to rely on signatures transmitted by fax or other electronic
medium, provided such transmission includes a transmission receipt
evidencing the source and time of same, and the sending party confirms
same by delivering an original signature on such document to the
receiving party within two (2) business days. [0127] c. The parties
agree that the issuance of a Policy in connection with a Plan shall
constitute Insurer's agreement that such Policy be governed by this
Agreement, without need for execution of a new copy of this Agreement.
Therefore, Sponsor is authorized to attach a true and correct copy
of this Agreement to each Plan adopted by each employer who adopts
such Plan, and to similarly attach a copy of same to each application
for ruling or determination that Sponsor makes to the Internal Revenue
Service or Department of Labor in connection with any such Plan.
[0128] IN WITNESS WHEREOF, the parties have by their authorized
officers affixed their signatures on the date first above written.
ATTEST: INSURER ______ BY: ______(SEAL) Name: ______ Name: ______
Title: ______ Title: ______ ATTEST: SPONSOR ______ BY: ______ (SEAL)
Name: ______ Name: ______ Title: ______ Title: ______
APPENDIX B
[0128] Ltr. Rul. 9014068
Code Sec. 401
[0129] Sec. 401 Issues: Qualified pension, profit-sharing, and
stock bonus plan--Plan termination payments by defined benefit plans.
<<Full Text>>
[0130] In your letter of ______ you requested, on behalf of the
Plan, rulings on the application of the "incidental death benefit
rule" to the purchase by the Plan of the Policy as part of
the funding of benefits for participants of the Plan. ______ which
issues the Policy, is a wholly owned subsidiary of the ______ which
in turn is the employer and sponsor of the Plan. The Plan is a qualified
defined contribution plan which by its terms permits a participant
to elect to have a certain portion of his/her Plan contributions
used as premiums for a Policy on his/her life.
Facts
[0131] The Policy has a level face amount. Both the Coverage period
and the premium payment period extend from the issue of the Policy
to the earlier of the participant's death or the participant's attainment
of age 100.
[0132] The Policy gives the participant covered thereunder the
right to direct that the cash value (consisting of the accumulation
of past and current net premiums together with interest thereon)
be invested in shares of various mutual fund portfolios of the ______.
The cash value of the Policy will vary in accordance with the investment
experience of these mutual fund portfolios and is not guaranteed
as to amount. The death benefit under the Policy is however not
affected by the amount of the Policy's cash value, except to the
extent noted hereafter.
[0133] As long as premiums are paid in the amount and at the times
specified in the Policy, the death benefit cannot fall below the
aforementioned face amount. There are however two circumstances
when the death benefit will exceed that amount:
[0134] (1) whenever the Policy's cash value exceeds the net single
premium for that face amount of level lifetime death benefit, the
Policy provides that the death benefit is increased to the amount
necessary to satisfy section 7702 of the Internal Revenue Code (the
"Code");
[0135] (2) under the Policy's Option 2 (assuming the participant
has elected this) under which the excess (if any) of the Policy's
cash value over the "tabular cash value" (essentially
the net level premium reserve on a regular whole life policy having
the same face amount and the same net premium as the Policy) is
added to the Policy's face amount, with the total becoming the death
benefit payable under the Policy.
[0136] The Policy also permits the participant to direct that additional
"unscheduled payments", over and above those called for
by the regular level premium payment schedule, be made to the Policy
as extra premiums which are allocated immediately and entirely to
the cash value. Such additional payments can be made only by transfer
from other accumulations to the credit of the participant under
the Plan. To the extent that, as a result of such additional payments,
the cash value is increased to a level that is in excess of the
tabular cash value, there would (if Option 2 is in effect) be an
additional death benefit--i.e., one in addition to the Policy's
face amount--in the amount of such excess. Even if Option 2 is not
in effect, the aforementioned increase in cash value could lead
to a death benefit larger than the face amount, by reason of the
"section 7702" provisions.
[0137] Finally, the Policy contains a "Special Premium Option"
that comes into effect if and only if there to an excess of the
(actual) cash value over the tabular cash value. When this excess
is at least as great as the scheduled premium currently due, this
option permits withdrawal from the cash value of an amount equal
to that premium, so that by this means the premium is paid in full
and the Policy remains in force.
Law and Regulations
[0138] Section 401 (a) of the Code provides that, for a plan to
be qualified, the contributions made by the employer must be for
the purpose of distributing to employees or their beneficiaries
the corpus and income of the fund accumulated by the trust in accordance
with the plan.
[0139] Section 1.401-1 (b) (I) of the Income Tax Regulations states
that a plan may provide for the payment of incidental death benefits
through insurance or otherwise. Revenue Ruling 54-51, 1954-1 C.B.
147, states that ordinary life insurance may be considered "incidental"
where the aggregate premiums for such life insurance in the case
of each participant are less than 50% of the aggregate of contributions
allocated to such participant at any particular time.
Analysis
[0140] The Policy is similar to a traditional ordinary whole life
insurance policy insofar as it basically provides death benefit
coverage for life in a stipulated level amount as long as scheduled
level premiums are paid as they fall due.
[0141] It differs from a traditional ordinary whole life insurance
policy essentially only in that it generally does not contain guaranteed
(i.e., contractual) cash values and that it permits, in addition
to the level premium payment schedule under the Policy, unscheduled
extra premiums to be made to the Policy, where (if Option 2 is not
in effect) such extra premiums do not directly affect the death
benefit amount but rather are allocated directly to the cash value,
which can affect the death benefit but not to a significant degree.
If however option 2 is in effect, the potential for increase in,
death benefit is significant and might well exceed what we would
consider "incidental" in this context. Accordingly, this
ruling letter does not address the situation in which the option
2 provisions are applicable. The balance of this letter is based
on the assumption that such provisions are not in effect.
[0142] In general, an insurance policy may be deemed to be ordinary
whole life insurance for the purpose of applying Revenue Ruling
54-51 if, by the terms of the policy, the following two conditions
are met:
[0143] (1) the amount of the death benefit may not decrease, and
[0144] (2) the contractual premium may not increase during the
period which is the lesser of the lifetime of the participant or
the time the policy remains in force.
[0145] The Policy deviates from (1) above only insofar as a decline
in the cash value from (a) a level that would cause the "section
7702" provisions to be operative, to (b) a level where they
would not. We deem the decrease in death benefit in these circumstances
to be a de minimis situation that does not preclude compliance with
the condition in (1).
[0146] As to condition (2) above, the unscheduled extra premiums
that are permitted under the Policy are not contractual (in the
sense of being required to assure payment of the full death benefit)
and in any case do not affect the amount of death benefit payable,
except of course to the extent that the cash value (which is affected
by these extra premiums) reaches a level that brings the "section
7702" provisions into operation.
CONCLUSIONS
[0147] 1. The Policy (in the absence of an election to have Option
2 made applicable) is an ordinary whole life insurance policy within
the meaning of Revenue Ruling 54-51.
[0148] 2. A defined contribution (individual account) plan which
is in all other respects qualified under Code section 401(a) will
not fail to qualify merely because a participant is permitted to
direct that up to 50% of total contributions otherwise allocated
in full to his/her account be used as premiums for a Policy on his/her
life. |