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RMD and Cash Value of Life Insurance

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For a money purchase plan participant the only asset in her account is a life insurance policy with a cash surrender value. She has to take required minimum distributions so i assume the RMD would be take each year from her cash surrender value. Agree? However, the plan sponsor was not aware of the ability to use cash surrender value for RMD  and instead used other plan assets to pay her RMD through the years. Now the policy has a zero cash surrender value. Would you agree that the employer has the responsibility to make the plan whole given that the cash surrender value is zero?

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I can't answer why the life insurance policy was held after NRA but the policy had a cash value so RMD should have been made from the cash value but the plan sponsor mistakenly made the RMD to this participant from other plan assets. Subsequently, through the years the cash value of the policy went to zero. So it seems that the plan needs to be made whole by the employer

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Huh? What do you mean by "mistakenly" made RMD's from other assets? The cash value of the insurance policy is included in the participant's account balance. So the RMD is made based on the entire account balance, including the cash value of the life insurance. It isn't one distribution from the fund, and a separate distribution from the life insurance. 

And if the RMD's were made from "other" plan assets, (which is fine) then why is the life insurance cash value zero? Was the premium being paid by automatic premium loan or something, etc.?

And although I find your post confusing, what makes you think the plan sponsor is responsible for making the plan "whole?" Nothing in your post suggests to me that the plan sponsor has distributed funds in excess of what should have been distributed. Please explain why you think the plan isn't "whole." Maybe there are distributions in excess of the total the participant is entitled to?

As to the policy in the plan past NRA, you should look at your plan document. Is this participant still employed, or terminated? It sounds like you could have an operational violation - the plan will almost certainly specify the appropriate provisions regarding life insurance policies.

Good luck.

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Belgarath, I think the RMDs came from other participants' assets.  

Ananda, if I were trying to fix this, I'd have to re-create the transactions that occured and (I guess) somehow treat the distributions that were made from other participants as "loans" or otherwise treat them as money owed from that one participant to others.  Then...I'm not sure how it would be fixed; the participant owes them money but has none.  First step would be to ask for money back; assuming it is not coming back then (I think) ultimately the sponsor should be making that up.  

Honestly, more questions than answers...the big one being "how could this possibly happen?"  Was an accountant handling the plan?

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Ed Snyder

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