Life Insurance Policies in DB Plans

[Guest JTS1675]

Are owers/highly compensated employees allowed to purchase (take distribution) their life insurance policy from the plan if the plan is underfunded?

[SoCalActuary]

First, I suggest you move the topic to DB forum.

Second, if they purchase the policy, then they are transferring funds from outside sources into the plan, and exchanging funds for ownership of the policy. An exemption from PT is allowed here.

Third, if they just take the policy, then it is a lump sum distribution that is subject to the 401(a)(4) restrictions for underfunded plans.

[Belgarath]

If you want to look at the PT exemption that SoCal mentions, see PTE 92-6. You also want to be careful here - the PTE is based on cash surrender value, but the IRS, in the guidance issued in February of 2004, is concerned with Fair Market Value. So even if you satisfy the PT exemption, you could run afoul of the IRS guidance if your cash surrender value is less than your fair market value.