Employee Plans Compliance Unit (EPCU) - Completed Projects - Schedule A (Insurance Information) Project
Schedule A Project Summary
The EPCU Schedule A Project began in September of 2008 and ended in September of 2009. The project was designed to verify the compliance of a defined contribution plan which purchased life insurance for plan participants.
A defined contribution plan may provide for the payment of death benefits that are incidental to the primary purpose of providing retirement benefits by purchasing life insurance. This is commonly known as the Incidental Benefit Rule addressed in Treasury Regulations Section 1.401-1(b)(1)(i) - (ii).
Since defined contribution plans provide for individual accounts, any life insurance purchased is an investment for that particular participant’s account. Purchasing life insurance is a plan benefit, right, and feature which must comply with the nondiscrimination requirements under Code section 401(a)(4).
This project was designed to obtain information on whether:
(1) the amounts of insurance purchased and insurance premiums were
properly reported on the Form 5500, Schedule A.
(2) the Incidental Benefit Rule was met.
(3) the insurance was offered in a non-discriminatory manner.
Results of the Schedule A Project
Although many filers contacted completed the Schedule A correctly (59%), many of the Schedules A had entry errors. The Schedule A should be completed using whole dollar amounts. Any Schedule A that was filed reporting dollar and cents was recorded as dollars. This inflated the true amounts by a hundred times. For example, an amount reported on the Schedule A as $28,000.00 was recorded as $2,800,000.
In terms of potential discrimination issues, when actual premiums and death benefits were provided, life insurance purchases by highly compensated employees were shown to be much larger than those for non-highly compensated employees in the same plan. However, this appeared to be a result of highly compensated employees having greater account balances from contributions and rollovers; particularly since plan language indicates that life insurance is available to all participants on an equivalent basis. Whether non-highly compensated employees are actually aware that life insurance is an available option for direct investment can only be determined by examination through a review of plan communications.
A number of plans had extremely large life insurance premium amounts which appeared to exceed the Incidental Benefit Rule. Compliance check responses verified that an exception available only for profit sharing or stock bonus plans was being used (see Revenue Ruling 71-295) and the limits had not been exceeded.