Life Insurance Change of Ownership / Distribution / RMD

[MarZDoates]

Participant has a life insurance policy as an asset in her 401(k) account. (Plan is the owner.)

It is my understanding that the ownership of this policy can be changed from the plan to the participant/individual. The participant would be taxed on the cash surrender value. Is this correct?

If this is correct, can the cash surrender value be “counted” as part of her RMD due for the year?

Example: Participant’s RMD for 2016 is $10,000. Cash surrender value of life insurance policy is $2,000. The plan would issue a distribution check in the amount $8,000 to the participant. Is this permitted?

Thank you.

[Lou S.]

There is a good rundown here http://www.napa-net.org/news/technical-competence/case-of-the-week/case-of-the-week-valuing-life-insurance-contracts-distributed-from-a-401k-plan/?mqsc=E3854111&utm_source=WhatCountsEmail&utm_medium=NAPA_Net_ListNapa-Net%20Daily&utm_campaign=2016.10.20%20-%20NAPA%20eNews%20-%20(Thu)

The long and short is CSV may or may not accurately reflect the fair market value. See IRS Rev Proc 2005-25.

But yes I believe a taxable distribution of the Insurance Policy can satisfy some or all of the RMD. But I thought Insurance Policies couldn't be held after Normal Retirement Age had been met under Incidental Death Benefit Rules but maybe I'm confusing that rule.

[MarZDoates]

Lou, I think you are right about the life policy not being held after NRA (from what I read). This was a yucky takeover with lots of issues. Thank you for the link.