3815 / Can an existing defined benefit plan be converted into a fully insured (412(i)) plan?
An existing defined benefit plan can be converted to a fully insured plan, and the requirement that payment of level annual premiums commence with the beginning of plan participation will be considered satisfied, if:
(1) the plan otherwise satisfies the requirements under IRC Sections 412(e)(3), 403(a), and 404(a)(2) for the plan year containing the conversion date;
(2) all benefits accruing for each participant on and after the conversion date are funded by level annual premium contracts under which payments begin at the time when the increased accrual becomes effective and end not later than the individual’s normal retirement age;
(3) all benefits accrued for each participant prior to the conversion date are guaranteed through insurance or annuity contracts, the purchase price of which equals the minimum amount required by the life insurance company for a contract that guarantees to provide the accrued benefits, including any optional forms of
benefit;
(4) there are meaningful continuing benefit accruals under the plan after the conversion date (i.e., for at least three years); and
(5) the following are accomplished before the conversion date: (x) the contracts are purchased guaranteeing the benefits, (y) any remaining plan assets are applied to the payment or prepayment of premiums described in (2) above, and (z) any necessary plan amendments are adopted and made effective.1
The IRS determined that where a defined benefit plan was terminated and plan assets were used to purchase fully insured annuity contracts for participants, no “meaningful benefit accruals” would occur after the date of the conversion; thus, the plan could not meet the requirements for conversion.2
Final nondiscrimination regulations under IRC Section 401(a)(4) include a safe harbor for fully insured insurance contract plans.3