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truphao: The life insurance policy is an asset of the Plan, it is as any other asset, owned by the Plan and the Plan is the beneficiary. The employee maintains a beneficiary designation on file, similar to other investments. Upon the death of the insured the death proceeds are passed to the Plan. Upon claim of the Plan's assets by the beneficiary, the life insurance proceeds are split, the net death benefit represented by the face amount of the policy minus it's cash value, is passed to the beneficiary income-tax free. The cash value is added to the other investment and becomes a taxable distribution eligible for transfer/rollover to an IRA or other retirement plan that accepts transfers/rollovers. The 1099 issued reflects the death benefit and the eligible distribution. The calculation of the the net amount at risk and the cash value is performed by the life insurance company as of the date of date showing exactly the face amount and cash value. If there is any basis in the policy (recouped economic benefit cost, known as the PS 59 cost), that is the responsibility of the insured to track.

Refer them to their legal counsel for any such questions unless you are an attorney. Tell them it is outside the scope or your services or expertise.

Not a lawyer but all TPAs have E&O insurance for a reason. We are required to act in a professional manner and can't be negligent and just say, "well the PA has the only legal responsibility". But as noted this is for a lawyer to opine on if it is worth the legal fight.

Very few contracts are bulletproof, but is it worth the cost and headache to maybe be able to shift some of the burden to the prior service provider? I agree with Lou, refer them to outside legal counsel. Also, consider that there are probably three sides to the story: the client's side, the TPA's side, and the truth.

Yes, I agree that the accrued benefit has to be limited to 415. However that does not restrict the hypothetical account balance.

It's not taxable at time of offset. Which means your second sentence is accurate; it is only used for applying limits (and in fact the loan exists so if the limit is one per participant it counts as a loan and another one can't be taken).

And if the participant pays the loan, the plan will have to track basis. Wheeeee!

To make a commission

Lou S: I am going to take an uninformed and unresearched shot at guessing that interest payments on the defaulted and taxed loan are “pre-tax” amounts, just as are regular plan loan interest payments, and also earnings on other after – tax amounts, such as voluntary contributions (excluding Roth).

There is no requirement that the hypothetical account balance be limited to the 415 max lump sum. 415 controls what can actually be paid out of the plan, so if the hypothetical account balance exceeds the maximum lump sum on the actual distribution date, then the entire hypothetical account balance could not be paid. But purely from a plan design perspective it doesn't matter.

Yes, but my recollection is that the additional phantom interest (i.e., the phantom interest that accrues after the loan has been deemed) is treated as taxable at the time of offset. I think it is only used for purposes of determining whether a new loan can be taken under the $50,000/50% test.

Thank you, now I understand. Putting a high-comission long cost-amortization period financial tax-deferred product inside a tax-deferred plan which is likely to get terminated in 5-6 years to create a maze of non-dsicrimination, valuation and compliance issues. Nevermind that it is practically impossible to obtain a "market value" of the policy and that a life insurance cannot be rolled over into IRA upon termination. Did I get it right?

Perhaps these two rules might help you answer some aspects of your question. Interpreting the Employee Retirement Income Security Act of 1974’s title I: 29 C.F.R. § 2520.104b-31 https://www.ecfr.gov/current/title-29/part-2520/section-2520.104b-31#p-2520.104b-31(a); Interpreting the Internal Revenue Code of 1986: 26 C.F.R. § 1.401(a)-21 https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)-21#p-1.401(a)-21(a). These rules set conditions for using electronic communications to meet some notice requirements. But a communication that meets these rules might not be enough for a communication about a plan’s end and final distribution. Among other points, a plan’s fiduciary might evaluate risks that some participants, beneficiaries, or alternate payees might fail to read an electronic communication.