Cash Value of Insurance on 5500

[KateSmithPA]

I have looked back over the messages for the past year and this question has been asked twice, but never answered. I hope someone will be able to answer it this time.

Our firm has always included the cash value of life insurance policies, owned as assets of defined contribution plans, as an asset on the 5500. During 2002, we took over administration for plan which had four life insurance policies with cash values equal to about $30,000. The value of those cash policies was not included on their previous 5500. I called the previous record-keeper and was told that they never include the cash values as assets of the plan on the 5500.

All insurance policies were surrendered since the last 5500 was filed and the assets deposited to the participants' accounts. Since the cash values were not included on last year's 5500, how do I account for this additional $30,000 in plan assets? I don't believe the gain can be attributed to investment gain.

Any help would be appreciated.

[E as in ERISA]

Assets are generally reported at current value, and the increases in value are recorded as income. For an insurance policy, you generally report something similar to the cash value and the increases in cash value.

Technically the prior 5500s should be amended to record the annual increases, so that you don't have a full $30,000 to record as income in the current year. If they choose not to do that, you'll have to figure out some way to explain to the DOL on the current year 5500 why the beginning balances are not the same as the prior year ending balances.

[KateSmithPA]

Thank you, Katherine. That's what I was afraid of.

[Guest Kristina K]

Since there are many TPAs out there who are not including the insurance cash values in the plan assets. (Although they should as that is really what the DOL and IRS want to see happen. However, ...)

Whether you are the new TPA or a TPA who has decided to begin including the insurance cash value in the 5500 plan asset reporting, it is not practical to go back through all prior years of the plan to make a change to comply with current expectations.

I would recommend that you include the increase in the insurance cash value as a gain to the plan (Other income for Sch H filers) and include an enclosure (can't use the word attachment, as you are not allowed to attach anything to your 5500s) for the Sch H or Sch I explaining the large increase in the income/gain for the plan year. Remember, include the information in Items A, B, C and D from the Schedule that you are referencing, the plan year, the year of the Schedule and the name of the Schedule, and the item number where the increase is found at the top of your enclosure.

While it may raise a flag, you have already explained it in your enclosure which will be reviewed by a human before a letter is mailed or other action taken.

[Casey]

On what line and schedule would the cash value of the life insurance contract be listed?

Thanks,

Casey

[could be me maybe not]

Relying on memory alone, I have always been of the impression that the CSV of a life insurance policy was not required to be reported on the 5500. If the instructions now say they must, then I think something changed. If the instructions say yes, then I agree the filings should be amended. But I an not at all sure that they do in which case I would not amend prior filings, just add them as other income.