Life Insurance Proceeds and 1099R

[Guest Richard Scheer]

Patricipant in a 401(k) Plan has a life insurance policy and dies. Face Value is paid to the Trust and then distributed to the participant. Assuming that the PS 58 costs have been reported each year, it is my understanding that the cash value of the policy is taxable to the beneficiary and that the excess above the cash value is distributed tax-free. How does the tax-free portion get reported on a 1099-R?

[Guest Sieve]

I assume the face value of the policy is distributed after death to the beneficiary (not the participant--that would be quite a trick!!). I don't know how it's reported on the 1099-R, but the cash value is taxable only to the extent it exceeds the basis (i.e., amounts included in income over the years).

[Bird]

I think you put the gross amount in Box 1 and the taxable amount in Box 2a, assuming it's all paid in cash. I believe the taxable portion is eligible for rollover so taxes should be/should have been withheld. If that portion was rolled over then you need 2 1099s. I think Sieve is right that you further reduce the taxable amount by accumulated PS-58s.

[Guest Richard Scheer]

Thanks for the replies. In this case, the beneficiary rolled over the taxable amount to an IRA and received the tax-free distribution as cash. I will issue a 1099-R for the rollover with a code G. What code should be used for the tax-free distribution?

[Bird]

What code should be used for the tax-free distribution?

4 (death)

The rollover should be 4G. It won't change anything, but that's what they want.