Consultant Comments on Proposed Employee Benefit Plan Regs

A consultant has submitted comments on the proposed regulations regarding 10-or-more-employer benefit plans.

Document Type: Public Comments on Regulations

Tax Analysts Document Number: Doc 2002-26053 (2 original pages) [PDF]

Tax Analysts Electronic Citation: 2002 TNT 230-9

Citations: (15 Nov 2002)

=============== SUMMARY ===============

Russell J. Mueller, Arlington, Va., has submitted comments on the proposed regulations (REG-165868-01) regarding 10-or-more- employer benefit plans.

According to Mueller, any attempt to prohibit funding section 419A(f)(6) plans with cash value life insurance will result in legal challenges. He says that it should be made clear that one plan or trust can provide all permitted benefits, including medical and long- term care benefits. Mueller understands the problem of deferred compensation and asserts that the best way around it is "to require that any distribution of cash value life insurance be accompanied by a payment by the participant equal to the cash value."

=============== FULL TEXT ===============

From: rmueller703
Sent: Friday, November 15, 2002 4:33 PM
To: William F. Sweetnam
Subject: Thanks for Your Indulgence! Comments on IRS 419A
Proposed Regulations
Importance: High

[1] Bill, thanks for your indulgence yesterday in patiently listening to the testimony from the many points of view on section 419A plans.

[2] Hopefully any revisions to the final regulations will reflect the following points which may have been lost in the "noise" yesterday:

1. As much as Treasury's policy may reflect a bias against the use of cash value life insurance in funding section 419A(f)(6) plans, there is no prohibition under current law to use such as funding vehicles to provide the benefits permitted under current law; the attempt to write rules prohibiting the use of such as funding vehicles by rewriting the plain meaning of "experience rating" may have achieved its interrorem effect but is unlikely to stand in the face of future challenges and, as such, the rules should be rewritten.

2. Plans that have a single undivided pool of assets, including any cash values from individual life insurance policies owned by the plan, and pay benefits to all participants from such assets are operating within both the spirit and the letter of the current law. Plans that have actuarial gains and resulting surpluses that increase employee benefits or reduce employer contributions using a basis that does not "target" the employer- based sources of such gains, but which benefits all plan participants or contributing employers, respectively, should be recognized as operating within the current law and not in violation of the definition of "experience rating". This principle is crucial to the future use of section 419A(f)(6) for plans providing medical and long-term care benefits, as well as the other listed benefits.

3. It should be made clear that one plan/trust can provide all permitted benefits, including medical and long-term care benefits.

4. Employers who end their plan participation should be permitted to be allocated only their "pro-rata" share of total plan assets existing at the time of their withdrawal; this is consistent with any other rule that might be included which would require such a "pro-rata" distribution at the time the entire plan terminates. This principle is obviously crucial, given that just the presence of the proposed regulations is producing many plan terminations, leaving less than about 10 plans operating.

5. "Experience rating" should be interpreted the same for union plans as for non-union plans (can union plans use cash-value life insurance to fund plan benefits? If so, it seems punitive that non-union plans be singled out for proscriptive treatment.)

6. It seems to me that Treasury has the authority to apply its new definition of "experience rating" prospectively to new plans on a date separate from existing plans and to existing plan contributors as of a future date (such as 3-5 years hence) and fairness would dictate that this be accomplished in any final regulations.

[3] Bill, I understand Treasury's concern regarding plans masquerading as "deferred compensation"; however, I believe the best way to achieve such a policy goal would be to require that any distribution of cash value life insurance policies be accompanied by a payment to the plan by the plan participant in an amount equal to the cash value. This would serve to end the abuse without shutting out the ability of 419A plans to use any means of funding the permitted benefits, including long-term care, medical, etc.

[4] Question: Are the comments submitted to the IRS on 419 and on the split-dollar issues available? If so, how do I go about getting copies?

[5] Again, thanks for your indulgence!

Russell J. Mueller, Consultant
Arlington, VA

Code Section: Section 419A -- Qualified Asset Account Limits
Geographic Identifier: United States
Subject Area: Benefits and pensions
Insurance company taxation
Industry Group: Insurance
Cross Reference: For a summary of REG-165868-01, see Tax Notes, Jul. 15, 2002, p. 362;
for the full text, see Doc 2002-16302 (13 original pages) [PDF], 2002 TNT
135-12 , or H&D, Jul. 11, 2002, p. 378.
Author: Mueller, Russell J.