It is my understanding that the term cost of the death benefit can only be part of the funding, if the plan is at least partially funded by life insurance. However I am taking over a plan that had no life insurance, but added to the normal cost the term cost of the death benefit. The death benefit in the plan is the present value of the accrued benefit. There was no pre-retirement mortality factor in the assumptions. The sole participant is 100% vested. Do you agree that the prior year valuation was incorrect?

That does sound odd. Maybe they had a policy but surrendered it and someone forgot to take it out of the funding equation (software).

If the plan provides a death benefit, using a one-year term approach is an appropriate method for funding such death benefit. However, the only death benefit you describe is the cost of vesting, in this case 0. This would not make sense even if the plan used a multiple-decrement valuation methodology.

Thanks for your input. This term cost was not an error, but was intentional, and involves several plans. That's why I wanted to have a second opinion before I made an across the board change, in case I was overlooking something. Thanks!

Here is another wrinkle. I am going to change the way of doing business by taking the term cost out, since it should never have been in. Is this a change in funding method that must be reported on Schedule B? Does it require IRS approval?

Is it really a change? Or is the term cost just zero? Are you changing an assumption? Look carefully.

If you (I'm assuming you are the actuary) consider it a method change, then by all means, report it on the Schedule B. If it does not meet the conditions of Rev. Proc. 2000-40, then IRS approval would seem to be needed.

Doesn't this mean that the term cost should, and should have been, $0?