SteveH

I never really thought that this scenario was any problem, but now I have had someone tell me they don't think the premiums are deductible. We took over DB plan with 2 partners (owners) and about a dozen employees. Both of the owners have a $250,000 life insurance policy. I have had some confusion on this policy because some years they pay a premium and other years they do not. I have been informed that it is a Universal Life policy and the Trust only pays a premium if the policy requires a premium that year so that it does not lapse. The Plan does not have any death benefits as an incidental benefit. These policies are basically there because the partners felt that if one of them died the business profitibility would be negatively affected and be burdened with the DB plan. So the death benefit is being used to offset future costs. The way that I understand it, if a partner died the plan would receive $250,000 in cash to help offset future pension costs. So my quesiton is very similar to Dougsbpc which is still on the front page here. Except in his situation I think the plan is providing the $500,000 as an incidental benefit to the participant. In my scenario the trust is the only beneficiary of any death benefit payment. We have been considering the insurance policy like any other asset. In the years they make a premium payment the cash value is higher then when they do not make a premium payment. There is never very much value in the policy from year to year anyway, never more than a couple thousand dollars. It seems like they pay a premium of about $2,000 and then over the next couple years the policy uses up that $2,000 and the Trust then pays another $2,000. Now since the insurance is not being used to fund an incidental benefit, I have had a colleague question deducting the premium at all. We haven't given any consideration for the fact that there is an insurance policy in the plan at all. So saying that a portion of the annual contribution is not deductible because every couple years a small portion of the contribution is used to pay an insurance premium isn't making sense to me. Any thoughts?

thank you everyone.

No, no income needs to be imputed to him at all. We are confusing Cafeteria Plan issues with life Inusrance in a profit sharing plan. Imagine a client with a $400,000 profit sharing contribuiton plan balance. The contribution for 2005 was zero. He took $20,000 of his existing balance and purchased a life insurance policy. Imagine a self directed plan in which the participant buys antiques or shares in a limited partnership or anything else for that matter. The only difference is that he has invested a portion of his balance in a life insurance policy. The IRS has said that if you have insurance in the plan, then there is a current benefit for the life insurance coverage you have had for the year and you must pay taxes for that current benefit. The way that I understand it, it works out to basically be the cost for term insurance coverage for one year. So if $250,000 of term insurance for a 53 year old is $1,000, then he would receive a 1099 for $1,000 and he would pay the applicable personal tax rate on that $1,000. What I am trying to do is calculate that $1,000. It's not like tax evasion or anything else. There are a lot of code sections that talk about it, I just haven't found anything explaining how I calculate it. Chances are he probably won't die and the policy will be cashed in when he quits working. Then he will pay taxes on the full distribution. I saw a few references when I do a serch on the board for life insurance to a Sec. 79. I don't know what that is, or where to find it yet, but I am going to go try and find it and see if it helps.

I am asking how to calculate the PS-58 costs for the life insurance that is an asset in a profit sharing plan. Sorry I wasn't clear on that. I didn't use the phrase PS-58 since everything i have read says that after 2002 you can not use PS-58 rates anymore and you have to use the Table 2001 rates. Doing more research around this board, I am beginning to think that the guy in my office that said the first $50,000 was "free" only applies to Cafeteria Plans and that you would still pay the applicable current economic benefit cost. I think he was confused on the imputed wage for premiums over $50,000 of insurance coverage. Basically this guy has a life insurance policy inside a profit sharing plan. He needs to pay some sort of current tax on that so that in case he did actually die the benefit paid to him would not be taxable. I am trying to figure out what the correct method is to calculate that amount.

I'm confused on how to go about calculating the current economic benefit amount for his 1099. Hopefully someone can point me to a resource. We have one client this year that has an insurance policy with a face amount of $250,000. He is 53 years old. Now we are having this huge office discussion on what value he gets a 1099 for and it seems everyone has a different opinion. I thought it was simply multiplying the table 2001 rate for a 53 year old which is $3.20 by 250, which would equal $800. Someone else in my office brought up the fact that the first $50,000 face amount in a qualified plan is "free". So his calculation would be $3.20 times 200 = $640. Now another person brought up the fact that she thinks you have to subtract the cash value of the policy from the face amount prior to calculating. I don't know what the cash value is at this time, but let's just say it is $20,000. So her calculation is $736. She says she has never heard about the first $50,000 of face amount being "free". Now I am wondering if they are both right and the calculation is actualy 250 - 50 - 20 times 3.20 = $576. I do recall at a flexible spending account seminar someone mentioning something about $50,000 of life insurance but I don't remember what exactly they were referrign to. Also the argument about the cash value of the policy having to be subtracted because he the client is being taxed on the pure insurance benefit seems to be a logical argument. It all adds up to me being really confused and not sure where to go next to find out how much the client's 1099 should actually be. I'm considering calling the IRS and asking them. Any thoughts?

Argument at the office... If you have a brand new company with an older owner, let's assume 63 years old and looking at starting a DB plan. I thought you were confined to using a pretty standard definition of Normal Retirement Age. Something along the lines of 65 years old and 5 years of participation. A gentleman at my office that has been in the "pension business" for longer than I have been alive says that you can define the retirement age as anything, even 73 if you wanted. (Although he did say if there were employees we should have an early retirement provision that would allow the rank and file employees to retire at their "normal" time.) Well my software doesn't seem to allow me to input any retirement age over 65 and 5 years of participation. Besides I just don't see the point. The gentleman at my office has a history of being difficult and having selective memory of things you used to be able to do but you can't anymore. I swear some of the stuff he says is probably pre ERISA. The argument boils down to what his projected benefit at retirement is. I say on the proposal that it is going to look like 5 years of benefit accrual. He says that I should hard code his retirement date out 10 years so that he can accrue his full benefit. Obviously disclosing to him that he has to work 10 years to get this. In the end if he works till he is 73 we get to the same spot. The benefit is what it is. So if you can give me some ammunition I would appreciate it. So far I can't find anything that specifically says you CAN'T DO IT. I realize this isn't that big of a deal, but you know what it is like when the guy with WAY more experience is just being difficult for the sake of being difficult. It's driving me up a wall. I guess it boils down to, can you make the owner of the company work 10 years (at least past 65 and 5yop) until he can retire?