In a word, no.
There has been confusion on this issue in two regards. The first is a mere technical issue, and is not substantive. Prior to January 1, 2008, so-called fully-insured pension plans were authorized and defined under IRC subsection 412(i). Effective on that date, §412(i) was deleted from the Internal Revenue Code and replaced by §412(e)(3). The language is the same; the rules are the same. They are just found in a different subsection of §412.
The second is the area of concern. In February, 2004, the IRS published IR 2004-21, an announcement introducing the publication of two revenue rulings, a revenue procedure and proposed amendments to several Treasury regulations, collectively aimed at shutting down abusive §412(i) plans. Cutting through the technical language of the rulings, the Service saw essentially three areas where it found abuse:
- Excessive amounts of life insurance. The ruling’s language addressed plans that provided more benefits than the plan guaranteed, a violation of the Code’s requirements for qualification under §412(i). In practical terms, the Service was concerned with the violation of rules that require that death benefits be “incidental” in a pension plan. Apparently, some marketers have/had interpreted the term “fully insured” to man that the incidental rules do not apply. Of course, they do. “Fully insured” means that the plans are funded only with insurance products, i.e., life insurance and annuities. The ratio of such products issued in a plan must still result in death benefits that comply with the incidental rules.
- Products structured for distribution from the plans at below market value rates. These strategies included using “springing cash value” policies or valuing permanent life insurance policies based on net cash values (i.e., values reduced by large surrender charges) to permit employees to purchase the policies from the plans at minimal cost in attempted “tax neutral” transactions, with subsequent explosive cash value growth. The Service saw these, as well as the use of “special” high premium term policies that were to be converted outside of the plan to special conversion policies that grew enormous cash values, to be abusive attempts to avoid taxation.
- Use of insurance products for key personnel that had greater values, more beneficial features, etc. than those products used or non-key employees.
Bottom Line:
In the absence of these abuses, fully-insured pension plans remain viable, conservative and often appropriate means of addressing the pension needs many employers, especially in the small business market. All fully-insured plans written through UFG auspices conform strictly to the rules and limits established by the Internal Revenue Code, Regulations and Rulings for such plans.
