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You are describing a plan that is maintained solely for the purpose of holding the loans that originated under the plan. The plan is frozen and the trust is a wasting trust, meaning that distributions or transfers occur, there are but no contributions. The plan must observe all requirements, such as maintaining a complain document, filing Form 5500, providing notices and statements. I am curious about how this administrative expense and annoyance is justified. I understand aversion to plan mergers, but the merger was not avoided.

Assuming that the DP is not the employee's tax dependent, I believe the IRS has spoken on this and measures the imputed income on the basis of the value of the coverage for the DP, not the cost of the coverage. Whether that is right or wrong is kind of beside the point, as the employee's employer is either going to report some amount as taxable on the W-2 or not.