Proposed regulations from the Internal Revenue Service regarding the providing of added insurance coverage by a defined benefit plan could in fact inhibit the ability or the desire of plans to offer such benefits, according to comment letters from industry participants.
The proposed rule was opened for comment in August and drew the concern of groups such as the Association for Advanced Life Underwriting and the American Benefits Council.
In its comment letter, the AALU raised strong concerns about proposed regulations that it argued would tax any accident or health insurance premiums paid under a qualified retirement plan. Written by AALU President Larry Raymond, the letter called for the proposed regulations to either be withdrawn or be modified to create an exception for disability insurance benefits.
The American Benefits Council also took issue with changes in the handling of disability premiums. “With regard to the proposed regulation, we are concerned that it could affect a wide variety of common practices that our members use to provide and protect the retirement income of disabled employees under qualified plans,” said Lyn Dudley, vice president of retirement policy for the council in its comment letter. Specifically, ABC noted that those practices include the provision for continued defined contribution plan accruals for employees on long-term disability, including those with funding from employer contributions, the purchase of a special LTD policy designed for DC plans, or from a companion welfare benefit trust.
“The Council cannot identify any basis for subjecting these disability protection features to the concepts that Treasury and the Service have developed to address the treatment of health insurance,” Dudley wrote. “We are concerned that this proposed regulatory approach will prevent employers from continuing to maintain or add disability protection features to their qualified plans. Instead, the regulations should be designed to encourage the provision of disability protection in individual account plans through all of the methods in use today.”
The IRS has a rule allowing qualified retirement plans to provide “incidental benefits” in addition to retirement benefits, which provides the basis for providing life insurance under qualified plans and also encompasses accident or health insurance, which includes disability insurance. The amount of insurance premiums that can be paid for all incidental benefits cannot exceed 25% of the aggregate contributions allocated to a participant’s account.