buying life insurance with rollover money

[Santo Gold]

Employer wants to start a 401k plan and wants to have life insurance as an option. He has money in an IRA that he would like to rollover into the plan, and use either some, most, or all of the rollover to purchase a life insurance policy. Is it allowable to purchase insurance with rollover money, and is it discriminatory if only he purchases the insurance (ie, no one else wants insurance)?

Thanks

[E as in ERISA]

Do a search for "incidental benefit" or "incidental death benefit." When you have life insurance in a retirement plan, you are providing another type of benefit and such other benefits can generally only be "incidental."

[Ron Snyder]

While ERISA is correct that there is an incidental requirement for death benefits, that is not determinative. You postulated that the funds were rollover funds, and accumulated funds, which includes rollovers, are not subject to the same requirement.

The real problem is the nature of the funds. Simply because we can now roll IRA monies over into a 401(k) plan doesn't make those funds 401(k) funds. My educated guess is that the funds could be used for insurance only if the IRA rollover was a retirement plan distribution coming from a conduit IRA.

Gary Lesser, the IRA/Rollover master, would be a better one to ask. I suggest posting this on his IRA thread.

In any event it would not be discriminatory if only 1 participant desires to buy insurance with his rollover money.

[mbozek]

The 2001 tax act eliminated the difference between conduit and non conduit IRAs. Any IRA funds (other than AT money) can be rolled over to a Q plan from an IRA, where they become assets of the Qual plan for investment purposes. Before the change in the bkcy law it was recommended that IRA funds be rolled into a Q plan to prevent seizure by creditors.

Having only the HCE utilize an investment option does not violate the BRF rules if the option is available to all other participants. Otherwise every plan investment in which only HCEs invested would be discriminatory.

[Kirk Maldonado]

mbozek:

Would it be right then, under your analysis, that a person could borrow from funds that originated in a regular (i.e., not a rollover) IRA after those funds were transferred to a tax-qualified retirement plan, even though the person could not have borrowed from those fund while they were held in an IRA?

[mbozek]

The legislative history of Sections 641-3 of EGTRRA indicates that Congress intended to permit portability between IRAs and employer sponsored plans (other than nonqual DC plans of private employers) without distinction in how the funds could be used after transfer to the employer plan. The only reason for transferring Q plan funds to a Conduit IRA would be to retain special tax advantages, e.g., 10 yr averaging and captial gains if the funds were transferred back to a Q plan at a later date.