insurance premiums paid too early

[R. Butler]

Profit Sharing Plan has life insurance. Plan has a 1,000 hour/last day requirement for a contribution. A participant just terminated, the plan sponsor wrote a check for his insurance premiums already. Participant won't receive a contribution. Is there any argument that his distributable balance can be reduced by the amount of the insurance premium? I don't see it, but wanted to check.

Thanks in advance for any guidance.

[Belgarath]

I don't see any argument FOR including it. Seems to me that the participant was entitled to nothing for the year, so the permium must be "undone" somehow - this could get tricky if the insurance company has already credited the premium and isn't necessarily required to "reverse" or "undo" the transaction. But this $1,000 represents a plan contribution, and the terms of the plan will dictate that this $1,000 be allocated properly, so if paid to the insurance policy, the other participants will not be receiving their appropriate share of the employer contribution.

It may also be tricky to determine his "distributable balance." You likely could not reduce it by the entire $1,000, as the insurance policy probably didn't increase in value by the entire $1,000 premium amount? sounds like loads of fun! So I guess you would somehow have to get the insurance compnay to determine what the value "would" have been if the premium was not paid.

I suppose, maybe thinking outside the box, that perhaps if the participant wished to keep the policy in force, that the participant could simply reimburse the plan for the full $1,000 premium? Getting into murky water here...

[Bird]

IMO insurance premiums should always be treated as transfers from the side fund, not direct contributions. Viewed that way, the employer contributed $1,000 to the side fund then transferred it to the policy. If the side fund is pooled, that's the end of the discussion. If self-directed, then it's uglier; you have to actually take $1,000 from this particular participant's account and reallocate it to others.

[R. Butler]

IMO insurance premiums should always be treated as transfers from the side fund, not direct contributions. Viewed that way, the employer contributed $1,000 to the side fund then transferred it to the policy. If the side fund is pooled, that's the end of the discussion. If self-directed, then it's uglier; you have to actually take $1,000 from this particular participant's account and reallocate it to others.

That is the answer we want, but I'm a little jittery. Fortunately not self-directed.

Insurance in plans does not make sense to me, but if they are going to have insurance, they should pay it directly from the side account.

Eveen if we could somehow get the insurance company to return premiums it would take too much time to make it happen. It seeems to me plan sponsor has 2 options:

1. Treat it as a contribution to the investment account

2. Amend the plan to eliminate the last day requirement.

Other thoughts are still appreciated. Thank you