IRS Issues Positive PLR On Disability Coverage in 401(k)
The Internal Revenue Service has once again issued a positive private ruling for a group disability product inside a 401(k) plan. The ruling gives more details than a similar one promulgated over two years ago, which allowed the company to market a benefit designed to replace 401(k) contributions for disabled employees.
The earlier ruling (about two years ago) was lauded by commentators as an ingenious idea. But the new ruling helps more by filling in additional information on how the design avoids various IRC pitfalls.
The IRS determined that the arrangement would not violate:
(a) The "incidental benefit" rule, which limits profit sharing plans to providing no more than "incidental" life, accident or health insurance to any participant;
(b) The "contingent benefit" rule, which states that no benefit other than matching contributions can be contingent on the employee making elective deferrals under the plan; or
(c) The "exclusive benefit rule," which requires that the plan funds and income be used for the exclusive benefit of employees (or former employees) and their beneficiaries.
The IRS also determined that the limits under the Code on compensation, annual additions and elective deferrals, would be applied only at the time the premiums for the benefit were paid, not at a future time when benefits might be allocated to the disabled participants account under the plan.
