Producers have long viewed non-qualified plans for highly compensated executives as a lucrative area to be mined in pursuit of life insurance sales. But pension consultants contacted by National Underwriter say that sales opportunities in the qualified plan arena abound as well, a fact that many ignore.

“For a small employer, offering life insurance as part of a qualified plan is a big advantage because it gives employees estate planning opportunities in combination with their retirement plan,” says Sarah Simoneux, a certified pension consultant and immediate past president of American Society of Pension Professionals and Actuaries (ASPPA), Arlington, Va.

Life insurance inside a qualified plan also offers tax advantages. Policy premiums are paid against pre-tax earnings, thus lessoning the burden on cash flow. And, in exchange for their contributions to premiums, employers enjoy an income tax deduction.

For producers, source say, the sales opportunities are significant, but especially so should the business owner opt for a defined benefit plan. To satisfy non-discrimination testing under the Employee Retirement Income Security Act (ERISA), life insurance must be included in every employee’s defined benefit package should the employer choose to provide the insurance himself and/or key executives. By contrast, employers need only offer life insurance to employees under a defined contribution plan, such as a 401(k).

But observers caution that producers should not pursue qualified plan insurance sales without the assistance of a pension professional (such as a certified pension consultant, a designation now recognized by the Society of Financial Service Professionals) unless they have the requisite knowledge of tax and ERISA law pertaining to this area. And few do.

“The number of insurance professionals who spend enough time to experts in the qualified plan arena is woefully limited,” says Kerry Boyce, a pension consultant and CEO of Boyce & Associates, Scottsdale, Ariz. “As a firm, we deal with some 800 retirement plans that are serviced by 600 insurance agents and investment advisors. And of the 600, maybe 1% has an in-depth understanding of the qualified plan field, which is highly complex.”

Absent that expertise, insurance agents risk recommending a solution that runs afoul of IRS and ERISA laws — and generating bad publicity. In recent years, such breaches were most notable with respect to 412(i) defined benefit plans, which are typically used by older professionals and small business owners with few employees to build a large nest egg in a short space of time.

A glaring flaw uncovered by federal investigators was excess death benefit. Many employers violated the incidental benefit rule, which limits (exceptions notwithstanding) the amount of life insurance that a 412(i) plan may purchase to 50% of the annual contribution to the plan. Badly designed 412(i) plans — and substandard qualified plans generally –have been riddled with other problems.

“Oftentimes with these plans, certain employees don’t get covered, documents aren’t signed or filed with the IRS, or the taxable portion of insurance isn’t paid,” says Steven Dobrow, a pension consultant and president of San Francisco-based Primark Benefits. “If the business owner is going to buy something as complicated as a qualified retirement plan, then you need to have a team effort involving multiple professionals — a life insurance agent, a pension consultant and an accountant — who can help the client appreciate what they’re getting.”

Or not getting. Oftentimes, sources say, life insurance is not appropriate inside the qualified plan because contribution caps imposed on the plan are insufficient to meet the cash accumulation needs of employees (especially highly compensated executives) One solution to this problem, says Boyce, is to place the insurance inside a non-qualified plan. Because cash values inside life insurance grow tax-deferred, non-qualified plan participants can enjoy the same tax-favored treatment on the insurance component as they do on contributions to their qualified plan.

Sometimes, however, life insurance is best left out of the retirement plan, qualified or otherwise. In these instances, producers would do well to acknowledge the fact and leave the plan design to other professionals.

Says Simoneux: “Producers who can walk away from a sale build trust and integrity with the other players. I’ve seen agents get a ton of business after they do this.”

Boning up on the complex body of laws relevant to qualified plans will also stand them in good stead with partnering pension consultants. To that end, Simoneux recommends that producers enroll in several courses dealing with pension law, including the recently enacted Pension Reform Act of 2006. Advisors, she says, need to be particularly mindful of Safe Harbor provisions that, while exempting companies from discrimination testing, can be time-consuming and expensive to comply with.

“A lot of companies are questioning whether they should pay the additional expense or stick with the testing procedures, they have, she says. “The other discussion going on concerns the percentage of pay going into qualified plans that employees will tolerate before opting out of automatic enrollment. Some people think the threshold is 6%.”