Deductibility of insurance premiums in DB plans

[Guest Carol the Writer]

I was asked this question by a rather persistent insurance man. If you have a 412(i) plan (or any other tax-qualified DB plan), and because of underwriting delays the insurance company does not issue the policy until the second plan year of the plan, what is deductible for the first plan year? Tha annuity premium only? Or the total of the life insurance and the annuity premiums?

My first reaction was that the annuity only was deductible. Then he asked, when would the life insurance premium be deductible? Would it always be one year out of step with the plan year/tax year? And - here is where he really got me wondering what I have forgotten in my lifetime - what happens when you have an accrual basis taxpayer.

Any ideas would be welcome. Thanks!

[Belgarath]

"a rather persistent insurance man"

Is there any other kind? I can remember my grandfather, when I was in high school about a quarter of a century ago, singing some little ditty that went something like, "there's no one with endurance, like the guy who sells insurance..."

But on to your question. I'm not sure it lends itself well to generalities, but certainly there are many situations where the insurance premium is deductible for the prior year. Example - 2004 calendar year plan and fiscal year, end-of-year plan valuation. You wouldn't even know how much insurance to issue, and hence the premium, until sometime in 2005 when you complete the valuation. Most of the plans I've seen backdate the insurance to 12-31-04 in this situation. And as long as the premium is paid on or before the tax filing deadline (with extensions) it should be deductible for 2004.

Obviously there are many, many possible permutations to the above scenario, so I wouldn't rely on it too heavily!

[Guest flogger]

If the plan's formula calls for a benefit that is guaranteed (as it must be in 412(i)) by the insurance and/or annuities, then those premiums should be paid (or at least deposited into an agent's insurance trust for future premiums) by the time the company's taxes are due, just as in the case of a non 412(i) plan. Otherwise, the funding would be deficient as of the 8 1/2 months after the end of the PY.

(I also had originally answered an additional question that I now realized was not asked, so I have edited out that part of my response.)

That's my take--not the gospel but that's how I understand it.