Are fully insured plans subject to the incidental benefit limits on life insurance in qualified plans?
Yes. A fully insured plan may provide for the payment of “incidental” death benefits through life insurance in the same manner as any other defined benefit plan. The incidental benefit test is satisfied if (1) the cost of the benefit is less than 25 percent of the cost of all benefits provided under the plan (the 25 percent rule), (2) the insured death benefit is no more than 100 times the participant’s expected monthly benefit under the plan, or (3) less than 50 percent of the employer contribution credited to each participant’s account is used to purchase “ordinary life insurance.” What is the controversy that has surrounded fully insured plans? Some companies that marketed fully insured plans promoted funding that the Treasury Department viewed as abusive. For example, some companies designed the policy to result in very high deductible premiums, but used very low guaranteed rates. Many of these companies then suggested terminating the plan after just a few years, at which time the
