Insurance Rolled Into 401(k) Plan

[Guest DCquestioner]

Client terminated a 412i plan and rolled the Life Insurance policy and an Annuity Contract from the 412i into a brand new the 401(k) PS. The client is the only participant, and there are no other monies in the 401(k) Plan.

According to the ERISA Outline Book (2009 version Volume 2, page 3b.75). There is an exception to the incidental benefit rules if the insurance policy is purchased only with seasoned contributions--with the idea being that the plan can allow seasoned contributions to be distributed immediately.

The client intends to use the cash value from the annuity contract to pay premiums for the Life Insurance Policy.

I know that rollover monies are not the same as seasoned profit sharing contributions, but if the plan allows for the distribution of rollover monies immediately does the same logic apply.

I submitted a question to TAG on how the incidental benefit limits work on a rolled over insurance policy, and they said that the incidental benefit limits still apply to all insurance policies regardless of whether they were rolled over or not.

Anyone thoughts (even better a lead to some reading material) would be greatly appreciated!

[Bill Presson]

I've been dealing with this for a long time. Back in 1993, I asked some very specific questions and got General Information response from Jim Holland.

Part of that letter dealt with Rollovers. Here it is:

"You also asked whether the existence of rollover money from another qualified plan would have any effect on the transaction. Again, any question regarding the income tax effect of such a transaction is beyond the scope of a general information letter. However, we wish to draw your attention to certain considerations that affect the calculation of the level of incidental insurance coverage in such a situation.

The requirement that a profit-sharing plan provide for the accumulation of funds for a "fixed number of years" is found in section 1.401-1(b)(1)(ii) of the regulations. In applying the provisions of this section of the regulations to rollover money, the instant plan is considered separate from the prior plan. (See, for example, private letter ruling 8134110, dated may 28, 1981.) Furthermore, under Rev. Rul. 57-213, the amount of premiums that may be used to provide an incidental level of insurance coverage is determined with regard to the "total contributions and forfeitures" allocated to the participant's account. Because rollover money is neither a "contribution" nor a "forefeiture", no portion of the rollover money is taken into consideration when determining the amount of premiums that may be used to provide an incidental level of insurance coverage."

I know this isn't a ruling, but it is in writing and I've never seen anything more official to contradict it.

[Bird]

I agree with the IRS' logic in Bill's post. The other thing is that yes, you could take a distribution from rollover money (or seasoned money) and I think that might allow for a purchase not otherwise subject to the incidental benefit rules, but shouldn't it be taxed as s distribution in that event?