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Life Insurance for participant that is taking in service distributions

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Hi,

May everyone be well and safe.  Based on the incidental death benefit rules, a life insurance policy cannot be held beyond retirement of the employee. If an employee is still active, yet is beyond 62 and is taking in service distributions, must the policy on this employee be distributed/converted to cash value etc. as well?  In addition is there a difference if the one taking the in service distributions is an owner as opposed to an employee? Thank you for any insights on this matter. 

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Rev. Rul. 54-51 requires that for the life insurance to be "incidental", the policy must be converted to a retirement income or distributed to the participant no later than the normal retirement date under the plan.  Rev. Rul. 57-213 clarified that the life insurance policy may continue beyond the normal retirement age, provided the participant does not elect to retire.  I doesn't matter if they are taking in-service distributions or RMDs provided they continue to work.

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On 7/14/2020 at 5:06 PM, ErnieG said:

Rev. Rul. 54-51 requires that for the life insurance to be "incidental", the policy must be converted to a retirement income or distributed to the participant no later than the normal retirement date under the plan.  Rev. Rul. 57-213 clarified that the life insurance policy may continue beyond the normal retirement age, provided the participant does not elect to retire.  I doesn't matter if they are taking in-service distributions or RMDs provided they continue to work.

ErnieG, than you very much! Your knowledge and clear way of writing,  is much appreciated,

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However sooner or later, you'll have to deal with the policy.  DOL has a PTE https://www.federalregister.gov/documents/2002/09/03/02-22376/amendment-to-prohibited-transaction-exemption-92-6-pte-92-6-involving-the-transfer-of-individual that permits the sale of the contract by the plan to the participant, a relative, the employer or a trust.  This may be desirable if there's a need for coverage beyond NRA.

If it's a policy with cash value, the plan could take a maximum policy loan prior to the transfer which would reduce the cost to the buyer.

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Also, beware of transfer-for-value issues where buyer is not the insured. One suggestion in latter regard is for buyer to be a grantor (relative to insured) trust. This may also circumvent the three year rule estate inclusion rule where insured as buyer then wants to transfer the policy out of his estate to a non-spouse.

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Thank you very much, Retired, but still reading and FPGuy. Very helpful and of course very impressive.

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If the participant is an HCE and it is being offered to him, other participants would have to be treated similarly.

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On 7/17/2020 at 4:38 PM, AndyH said:

If the participant is an HCE and it is being offered to him, other participants would have to be treated similarly.

Thank you AndyH.

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