Elimination of Life Insurance in Profit Sharing Plan

[KJohnson]

I believe that the Trustee can simply surrender the policies for their cash value. To the extent that the plan is participant directed, I would think that you would simply inform participants that life insurance is no longer an option and they must select another investment option for the cash value.

To sell the policies to participants you would also need to comply with the PTE class exemption.

A follow up question--some plans provide for "in-kind" distribution of life insurance policies. If you are getting rid of life insurance in the plan, can you also get rid of this "distribution option" or would that be a 411(d)(6) problem. As a practical matter 411(d)(6) lets you get rid of the life insurance, but does it let you get rid of this no "worthless" distribution option?

[Guest dlm]

A profit sharing plan currently used employer contributions to pay life insurance premiums. The life insurance is an Ancillary benefit that is no protected under 411(d)(6).

The employer would like to get rid of the insurance all together.

Can the employer cash in the policies? Or must they allow for the participant to purchase the policy?

I can't seem to find anything in the Plan document.

Thanks

[Guest jdw]

Some cites that may be helpful: ERISA Opinion letter 98-07A and PTE 92-6 both discuss the transfer of policies to the participant, who may be otherwise uninsurable. If certain conditions are met, the plan may transfer the policy.

Notice 89-25, Q&A-10 and Rev. Rul. 59-195 discuss the tax issues.

[Guest PAUL DUGAN]

I would be careful in surrendering policies without participant and spouse approval. As indicated by jdw the DOL has issued a class exemption allowing the transfer of life insurance to the participant. The transfer can be handled with out any tax problems if the trustees borrow all the CV from the policy prior to transfer. An older policy can be a very valuable imvestment to an older uninsurable participant. Several years ago I was involved in a lawsuit by a beneficiary were the trustees had surrendered policies and the participant died shortly thereafter. The spouse did win.

[KJohnson]

I would be interested in the Court's rationale for finding liabiility. Was it based on a "benefits" claim under the plan document or some sort of fiduciary breach? If it was a fiduciary breach, did the Court rule that there must be a participant by participant determination of whether to surrender the policy or sell it to the particpant?

All things considered, if you are getting rid of life insurance, I would think that you would not want the added complexity of making sure that you comply with the PTE. Borrowing from the policy to reduce its value adds another level of complexity.

[Kirk Maldonado]

If you borrow from the policy, wouldn't some or all of the income attributable to the borrowed funds be taxable income as unrelated debt-financed income?