Problem with insurance premium

[Monica Barnard]

Hey Ya'll - client has 30 year old DC plan which was originally set up with whole life insurance policies. Corporation has stopped making contributions to plan (it's been 7 or 8 years). All life policies have been surrendered but one. Participant whose life is insured is still an employee. XYZ Insurance Co. holds assets in a deposit administration contract, and life policy was written by same XYZ Insurance Co. The insurance premium has been withdrawn from the contract and forwarded directly to pay premiums during the past few years. The premium payment is deducted from the participant's very old account balance. XYZ Insurance Co. rep handling deposit admin contract is now saying that they will no longer be able to deliver premiums, that it is beyond the terms of the contract. The problem as I see it is that if the corporation pays the premiums directly, that is a contribution which should be allocated among all eligible employees, which means there isn't enough contribution to pay the premium.

Can the participant pay the premium? She has been paying tax on PS-58 costs for nearly 30 years. If she can pay the premium herself, will she still have PS-58 cost? She is 3 years from retirement, and will be willing to purchase the policy at this time, but what is the best way to handle this in the meantime?

BTW, the IRS has audited this plan in the past 2 years, and auditor was fine with an ongoing plan not having contributions for this long, mainly because of the age of the plan.

Thanks for your help on this.

[Bird]

Just stop paying the premiums. Future premiums will be paid by automatic premium loan. (Check with the company but it's hard to imagine that's not in the contract.)

As an alternative...I'm not sure exactly what the problem is with paying from the deposit admin contract, but maybe an annual premium could be deducted manually.

I agree with your assessment of the problem with the employer paying the premium. And no, the employee can't pay it.

[Guest Mickey Maier]

Another option would be to strip the cash value out of the policy and transfer it to the participant (no tax) and let the participant pay the premium going forward.

[Monica Barnard]

Another option would be to strip the cash value out of the policy and transfer it to the participant (no tax) and let the participant pay the premium going forward.

And would the owner/beneficiary of the policy still be the PS Plan?

[Bill Presson]

Another option would be to strip the cash value out of the policy and transfer it to the participant (no tax) and let the participant pay the premium going forward.

And would the owner/beneficiary of the policy still be the PS Plan?

Not after the participant buys the policy. It would then be just like any other personal insurance policy. Here is the PTE for the sale:

DOL PTE 92-6 (amended 2002)

[Bird]

Just to clarify...we are now talking about a "sale" of the policy to the participant, which is permitted. If absolutely all of the cash value is borrowed out by the plan, then the value of the policy is $0 and the participant is buying it for $0 (or some nominal amount if 100% of the cash value isn't borrowed).

The participant might want to ask how much she would have to pay in premiums, PLUS interest on the policy loan, before going through with this.