Funding with Life Insurance

[Guest wjr]

It is my understanding that prior to SBJPA, death benefits provided through life insurance in an "eligible" 457(B) plan was fully taxable to the beneficiary since the employer was the owner of the assets.

Now since the assets are for the exclusive benefit of employees and held in "trust", has the taxation of the life insurance proceeds changed and a therefore should calculate the pure insurance amount and apply the PS-58 costs?

Also, are the life premiums subject to the incidental tests of 25% if using Variable Universal Life?

[Guest Tom Geer]

The requirement for a trust did not alter the tax treatment.

[Guest wjr]

Thanks Tom - So the entire life insurance policy and account value is subject to taxation. That's a good reason not to be doing it! Are the incidental rules applicable to 457 plans? In other words, can only 25% of the participant's 457(B) contribution be used toward purchasing a VUL policy? THANKS

[mbozek]

The trust requirement applies only to public employer plans. Assets of NP plans must be subject to the claims of the employers creditors.

[Guest Tom Geer]

Nope. I wouldn't be as certain with a term policy or a policy with an artificially reduced cash value, since the concept of 457 is that the plan has investments (real or hypothetical). At some point you may cross a line, although I'm not sure where the line is, what the line is based or or even if there really is a line.

mbozek raises a good point. Is the plan govenrmnetal? I have been assuming it is. If so, you get the benefit of the 457(B) rule stating: "A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year."