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Don't confuse this with the annual participant disclosures under ERISA 404(a)(5). Good Luck!

Is it a questionable pattern? Yes. Is it abusive? IMO, no unless the Service gives us better guidance on what that means. Abuse to me would be multiple employees who all come in w/ letters from the same dentist requiring prepayment for root canals, or an employee submitting the same paperwork over and over with the date blotted out or questionably altered. The problem w/ the few solutions that come to my mind is those would punish people with truly legitimate recurring hardships, such as a parent putting a child thru college or a medical patient with ongoing expenses.

Well, that's by no means the only solution, particularly if the participant wants to avoid current taxation and (possibly) premature distribution penalties. First, think "Fair Market Value." Although Cash Value and FMV are often the same, often they are not. But let's assume they are for the moment. Participant should be able to buy the policy from the plan for FMV. She writes a check to the plan for $13,000, plan assigns ownership of the policy to her. No taxation, and now she can roll her entire account balance in the plan over to an IRA if she wishes - (I'm assuming this isn't a DB plan that prohibits lump-sum distributions.). Sometimes a maximum loan is taken by the plan trustee and policy immediately then assigned. This reduces taxable distribution, but participant now receives a policy with an outstanding loan. There are additional "wrinkles" to this, potentially involving "taxable term cost basis" that require more detailed answers than I have time for now. The insurance company and/or agent should be able to provide you with this type of information - the fancier footwork typically involves policies with higher FMV. Hope this helps.