Rollover of life ins policy into a PS Plan

[QNPG]

#1: Is it permissible to rollover a life insurance policy from a previous qualified plan (DB) into a newly established PS Plan?

#2: If so, is it permissible to use the cash value of that policy to pay the current premiums on that same policy in this new PS Plan?

It is my understanding that life insurance premiums can only be paid from contributions and forfeitures (excluding earnings on that money). Premiums can also be paid from dividends from the policy.

Either way, would you please provide the cite to support your opinion? Thank you!

[Bill Presson]

#1: Is it permissible to rollover a life insurance policy from a previous qualified plan (DB) into a newly established PS Plan?

#2: If so, is it permissible to use the cash value of that policy to pay the current premiums on that same policy in this new PS Plan?

It is my understanding that life insurance premiums can only be paid from contributions and forfeitures (excluding earnings on that money). Premiums can also be paid from dividends from the policy.

Either way, would you please provide the cite to support your opinion? Thank you!

#1: Yes

#2: Yes

How an insurance policy is paid isn't really the issue.

The issue is the taxation of the amount that is paid for the policy and whether that amount meets the incidental benefit rules.

In performing the incidental test, you are correct about what is counted. Rollover amounts are not contributions and cannot be counted in meeting the test.

If the premium doesn't meet the incidental test, then the premium is taxable.

[Belgarath]

Re #2 - are you using a policy loan to "use" the cash value to pay the premium? If so, you may wish to consider UBTI issues as this may be considered "debt financed income." I stress "may" as this is a bit of a gray area.

[QNPG]

#1: Is it permissible to rollover a life insurance policy from a previous qualified plan (DB) into a newly established PS Plan?

#2: If so, is it permissible to use the cash value of that policy to pay the current premiums on that same policy in this new PS Plan?

It is my understanding that life insurance premiums can only be paid from contributions and forfeitures (excluding earnings on that money). Premiums can also be paid from dividends from the policy.

Either way, would you please provide the cite to support your opinion? Thank you!

#1: Yes

#2: Yes

How an insurance policy is paid isn't really the issue.

The issue is the taxation of the amount that is paid for the policy and whether that amount meets the incidental benefit rules.

In performing the incidental test, you are correct about what is counted. Rollover amounts are not contributions and cannot be counted in meeting the test.

If the premium doesn't meet the incidental test, then the premium is taxable.

Thank you for your response.

[Guest Sieve]

Make sure the plan permits investments in insurance contracts. There also may be an issue allowing only this individual to purchase insurance if others cannot.

I'm not doubting Bill's response (since I don't know all the nuances of life insurance held by a qualified plan), but it's my understanding that only rollover funds or a portion of employer contributions (including deferrals, but not including any earnings), or after-tax employee contributions, or contributions that have been in the plan at least 2 years, can be used to pay premiums. Otherwise, the incidental benfit rules are violated and the plan faces a qualification issue.

[Dennis Povloski]

I ran into a slightly different situation, but related to the original post.

Client terminated a 412i plan and rolled an insurance policy and an annuity from the 412i into a profit sharing plan. The intention was to use distributions from the annuity to pay for the insurance policy premiums. I posted the question as to whether this would violate the incidental benefit rules, to ASPPA for submission as an IRS Q&A, and the ASPPA folks handling the Q&As were nice enough to respond to the question for me. It was decided that since the Annuity and Insurance policy were both rollover assets, that it was ok to use the annuity to pay the insurance premiums. If new contributions to the plan were used to pay premiums, there would be an issue.

Don't know if that helps, but that's what we did.