Key Man Insurance in PS/(k) Plan

[12AX7]

I've taken over a plan that has 3 key man policies. The policies are not part of the account balances of the participant for whom the life insurance was purchased. Are the premium payments considered to be a profit sharing source allocation to participants? The prior administrator did not consider these amounts as an allocable contribution.

[Bill Presson]

I've taken over a plan that has 3 key man policies. The policies are not part of the account balances of the participant for whom the life insurance was purchased. Are the premium payments considered to be a profit sharing source allocation to participants? The prior administrator did not consider these amounts as an allocable contribution.

These are just pooled assets and are allocated pro rata just like any other assets.

The premiums are just expenses of the trust. Now I'm assuming that the trust is paying the premiums and NOT the employer.

[12AX7]

In a situation where the PS contribution is otherwise $0.00 in addition to the premiums, then it seems there would be no allocation to participants. Does this sound reasonable because that is what the other admins did.

[ESOP Guy]

In a situation where the PS contribution is otherwise $0.00 in addition to the premiums, then it seems there would be no allocation to participants. Does this sound reasonable because that is what the other admins did.

12AX7

Who pays the premium? Does the check come from the plan or the employer? If the plan, does the employer put money into the plan to fund the check that comes from the plan?

One needs to be very clear on this part of the facts in my mind.

[12AX7]

I'm looking at the asset spreadsheet done by accountant and he is showing premium as a "debit" from the assets. I need to clarify that amount as expense paid by the trust. Sorry for the confusion at the moment !

[Bill Presson]

Don't make this too hard.

Forget the death benefit for the moment. Just think about the cash value (assuming there is a cash value) as the equivalent of a money market fund. The "premiums" are just deposits from one asset to another.

[Bird]

Forget the death benefit for the moment. Just think about the cash value (assuming there is a cash value) as the equivalent of a money market fund. The "premiums" are just deposits from one asset to another.

I agree, just think of it as any other investment.

But...I would want to be sure that they really were intended to be key man policies and not just for the benefit of that one participant. Just because the prior admin was doing it that way doesn't mean it was intended. When insurance is involved, it's not unreasonable to start with the assumption that something has been screwed up.

[ESOP Guy]

I also agree it is just an investment and treat it that way.

But the way the question is asked it seems to be saying, but not clear on this point, that every year a deposit is being made to the plan to fund the premium.

If that is true it looks like a contribution is being made and that would need to be allocated as such. Than an expense would need to be deducted from everyone's account.

Bird asks a good question. Why put this in a plan and make it a general asset? What good does it do the plan to have this huge lump of money come into the plan at the key man's death to be given to everyone?

You can see this in an ESOP some times. They will buy a policy on someone who has a large balance and if they die the plan can have the funds to pay the beneficary in cash instead of stock. This helps the company manage repurchase problems. But even there I see the policy owned by the company outside the plan more than inside the plan.

[Bill Presson]

I also agree it is just an investment and treat it that way.

But the way the question is asked it seems to be saying, but not clear on this point, that every year a deposit is being made to the plan to fund the premium.

If that is true it looks like a contribution is being made and that would need to be allocated as such. Than an expense would need to be deducted from everyone's account.

Bird asks a good question. Why put this in a plan and make it a general asset? What good does it do the plan to have this huge lump of money come into the plan at the key man's death to be given to everyone?

You can see this in an ESOP some times. They will buy a policy on someone who has a large balance and if they die the plan can have the funds to pay the beneficary in cash instead of stock. This helps the company manage repurchase problems. But even there I see the policy owned by the company outside the plan more than inside the plan.

I agree that the premium comment needs clarification.

As to why put it in a plan as a general asset: though I don't see it very often, I have seen it as a way to protect the employees retirement future if the owner of a small business dies.

[R. Butler]

We have a plan with key man insurance as a general asset. Key man dies at the end of 2012, death beneift collected in 2013. A couple of issues:

1. This is the only plan that I have seen this type of plan investment. I assume that the difference between the death benefit and the policy's cash value is just gain. Am I correct about that?

2. Assuming that I am correct that it is gain, is it 2012 gain or 2013 gain? This is a little more difficult for me. I want to call it 2012 gain, but if mutual funds are held as a pooled asset we don't count dividends as paid on the date of record, most of the time we wouldn't even know the date of record. We generally count dividends as gain on the payment date.

Thanks in advance for any guidance.

[ESOP Guy]

R. Butler:

1) Yes I would treat it as a gain

2) I don't think anyone can point to a rule that covers this. I think the method you use to allocate the gain needs to be reasonable and non-discriminitory. Every plan document has a section in it that give the administrator the ability to operate the plan in a reasonable and non-discriminitory manner when the plan document is silent and/or ambiguious regarding a fact set. So my guess allocating it as an accrued income for 2012 or as cash income in 2013 meets that criteria. The only thing I would look at is who would it effect? Is there an HCE who quit in 2012 that wouldn't share if you accrued it? If so, I would double check on the idea accruing it isn't discrimintory. But if the population who is going to share is most likely similiar either way my guess it is safe either way.

[Bird]

I think it should be treated as a 2012 gain. Ultimately, it comes down to fair value, and the contract is worth the face amount immediately after death. Think of it in terms of what it could/should be sold for as of 12/31.