life insurance in a plan

[PensionNewbee]

Two participants have life insurance policies in a profit sharing plan. The plan sponsor wants the participants to buyt he policies and maintain them outside the plan. How is this done? Is this even possible? Wouldn't this be a prohibited transaction? Premature distribution?

[401 Chaos]

This can be a complicated topic. One of the best resources I've seen on the distribution of insurance in qualified plans is in Natalie Choate's book, Life and Death Planning with Qualified Plans (see attached link).

http://www.ataxplan.com/

[No Name]

It would be a prohibited transaction if the were no class exemption, but there is. The participants buy the policy for the amount of the cash surrender value. Its not a distribution since equal amounts are going in and coming out.

[E as in ERISA]

You better check the recent IRS rulings regarding the value of the insurance contracts. See http://benefitslink.com/pr/detail.php?id=37746

[g8r]

As stated earlier, there is a class exemption allowing the sale of the policy from the plan to the individual (assuming it's purchased at the fair market value). However, the class exemption only applies if the plan would have otherwise disposed of the policy. That's never been clear to me and I've told people to be safe the plan should be amended to provide that life insurance can no longer be maintained in the plan. That way it's clear that the plan would otherwise dispose of the policy and the only other concern is making sure you have valued the policy correctly based on the recent IRS rulings - i.e., beware of springing cash values.

[PensionNewbee]

from a mechanics standpoint, how is the actual transaction done? I assume (dangerouus, I realize) that there must be a change of ownership form and a check written, and then the cash equivalent is deposited in the participant's account. Is it that simple?

[ljr]

You are on the right track with the mechanics. Yes, you need a transfer of ownership form so the plan can transfer ownership to the Insured. Be sure to change the beneficiary at the same time to the estate of the Insured. You want to hand the new owner the policy with recorded copies of the ownership and beneficiary changes. It's a good idea to also ask for a beneficiary form so the Insured can name a beneficiary of his/her choice. Yes, you do need to collect a check and deposit it to the trust to the account of the participant. It might be a good idea to get a cashier's check.

[PensionNewbee]

Is the Trustee the one responsible for making the mechanics happen or is it supposed to be a life insurance agent?

[Lame Duck]

I think I would go back to the financial advisor working with the plan or the life insurance professional who sold the policies in the first place. Transfers of life insurance policies should be old hat for them and it's better than having the plan trustee make an error.