"Way out there" question re: life insurance in a QP

[SMB]

Small Profit Sharing Plan currently holds a life insurance policy (whole life, I think) for the benefit of owner (sound familiar?).

Owner is replacing the current policy with a "flexible variable" policy. First, am I correct in assuming that the "cumulative premium" is now subject to the "25% of cumulative contributions" incidental benefit rule?

Second - and here's where it gets interesting - the agent would like the participant to make a one-time "non-1035 non-repeating premium" of $10,000 to the Plan (I am a TPA - so have NO idea of what that means or entails.).

Could the participant direct $10,000 of his existing account to the new policy - in addition to the initial annual premium - subject, of course, to the "incidental benefit" rules?

[Also wonder if this approach (i.e., flexible variable policy vs. whole life) isn't a somewhat roundabout way of allowing the owner to self-direct a portion of his account (via the policy "sub-accounts")...]

Am almost completely "in the dark" here, so would appreciate any and all comments.

Thanks!

[Bird]

I think you're right about the 25% rule.

When you say he wants to pay a premium of $10,000 to the "Plan" I assume you meant "policy." It should be OK to use accumulated plan money for this, subject to the 25% limitation as you note.

It's a very expensive way to self-direct, if that is the motivation.

[SMB]

Bird,

Yes, I did mean an additional $10,000 to the "policy" vs. the "Plan". Thanks for noting that - and for your response.

[Guest dbvail]

For what it's worth, the 25% incidental benefit rule applies to current contributions (last time I looked, anyway). It is possible to use additional existing money in a PS plan to fund a policy in excess of that. This was not unheard of when the object was to spend a bunch of existing money to provide a death benefit and reduce the account value potentially subject to the old excess benefit stuff. I haven't seen it used in a long time except in cases of serious death benefit need or agent income enhancement. But like you, I'm just a TPA.