Life Insurance in DC Plan

[MarZDoates]

We have a two-participant profit sharing plan with discretionary contributions. One participant has a life insurance policy. Is it possible for the plan to pay the premium in a year where they don't make a p/s contribution? Logic tells me no..or at least that the contribution needs to be sufficient to cover the premium. The participant without a premium should receive an allocation also.

How would it work if the premium is paid for with "aged" money? For 5500 reporting purposes, would the insurance premium be shown as a transfer from the other investment account to the life insurance policy?

I'm not finding any guidance to support my thoughts.

Thanks.

[pmacduff]

We have a plan that is alittle larger but the premium payments are made directly from the Plan accounts and then shown on the valuation and participant statements as a transfer out to the insurance account.

That way in years when there is no profit share the premium is deducted from each participant's individual balance.

We account for the premium payments on the 5500 reporting as a plan expense.

[Bill Presson]

We have a two-participant profit sharing plan with discretionary contributions. One participant has a life insurance policy. Is it possible for the plan to pay the premium in a year where they don't make a p/s contribution? Logic tells me no..or at least that the contribution needs to be sufficient to cover the premium. The participant without a premium should receive an allocation also.

How would it work if the premium is paid for with "aged" money? For 5500 reporting purposes, would the insurance premium be shown as a transfer from the other investment account to the life insurance policy?

I'm not finding any guidance to support my thoughts.

Thanks.

No contribution has to be made (just be mindful of the incidental benefit rules), but forget for a moment that it's insurance.

Just think of it as two mutual funds and you're moving money from fund A to fund B. For these purposes that's about all you're doing. Obviously report it correctly on the 5500.

[MarZDoates]

Awesome. Thanks.

[Bird]

Just think of it as two mutual funds and you're moving money from fund A to fund B. For these purposes that's about all you're doing. Obviously report it correctly on the 5500.

Agree with the first statement. Curious about what you mean by the last sentence. On a full 5500 it would be listed separately but on an SF it's just part of the total. We do not treat a premium payment as an expense.

[pmacduff]

Bird - are you saying that you don't report the premium payments as an expense because it is an SF form or you don't do that in general?

If not - I'm just curious how you do report the premium payments from the plan?

[Bird]

Bird - are you saying that you don't report the premium payments as an expense because it is an SF form or you don't do that in general?

If not - I'm just curious how you do report the premium payments from the plan?

I don't have any regular 5500s with insurance but no, I don't treat it as an expense in general. As Bill puts it, it's really just a transfer from one investment to another. (With the exception being term insurance; that's a pure expense.)

[DMcGovern]

Bird - are you saying that you don't report the premium payments as an expense because it is an SF form or you don't do that in general?

If not - I'm just curious how you do report the premium payments from the plan?

I don't have any regular 5500s with insurance but no, I don't treat it as an expense in general. As Bill puts it, it's really just a transfer from one investment to another. (With the exception being term insurance; that's a pure expense.)

I know I'm going to get a lot of feedback on this, but I'll throw out this thought - what about the "PS-58" cost? Part of the premium represents a transfer from the investment account under the plan to the cash value of the insurance policy, which is also under the plan. (That would agree with the above posts.) Part of the premium is used to pay for the current death protection. That amount of the premium does leave the plan, and is taxable to the participant. Assume no other change in the participant's account (no contributions, earnings, expenses, etc). The total amount of the participant's account (investment and CSV) is reduced by the amount used to pay for the death benefit protection - because that is distributed from the plan.

Treating that portion as a distribution also affects top heavy testing.

[Bill Presson]

I know I'm going to get a lot of feedback on this, but I'll throw out this thought - what about the "PS-58" cost? Part of the premium represents a transfer from the investment account under the plan to the cash value of the insurance policy, which is also under the plan. (That would agree with the above posts.) Part of the premium is used to pay for the current death protection. That amount of the premium does leave the plan, and is taxable to the participant. Assume no other change in the participant's account (no contributions, earnings, expenses, etc). The total amount of the participant's account (investment and CSV) is reduced by the amount used to pay for the death benefit protection - because that is distributed from the plan.

Treating that portion as a distribution also affects top heavy testing.

The PS-58 cost is not a distribution. It's considered imputed income to the participant and is reported on a 1099 annually.

[Guest Sieve]

But there's still a limit as to what portion of the aggregate contributions made over the years can be used to pay ins. premiums, right?

[Bill Presson]

But there's still a limit as to what portion of the aggregate contributions made over the years can be used to pay ins. premiums, right?

Correct. 50% of contributions. This number does not include rollover amounts, which are not considered contributions for the incidental limit.

Also, many agents will use the "aged money" rules to say that the regs allow you to use up to 100% of money that has been in the plan for more than 2 years. What they fail to tell people is that, the regs allow that because it is then just like any distribution from a qualified plan that meets the same criteria. So then the entire premium would be taxable just like a deemed distribution.

[DMcGovern]

But there's still a limit as to what portion of the aggregate contributions made over the years can be used to pay ins. premiums, right?

Correct. 50% of contributions. This number does not include rollover amounts, which are not considered contributions for the incidental limit.

Also, many agents will use the "aged money" rules to say that the regs allow you to use up to 100% of money that has been in the plan for more than 2 years. What they fail to tell people is that, the regs allow that because it is then just like any distribution from a qualified plan that meets the same criteria. So then the entire premium would be taxable just like a deemed distribution.

Isn't it 50% for whole life, but 25% for term, variable, and universal life?

I agree about the aged, or seasoned money issue - they also do the same thing with rollover money. And, they don't tell them that in addition to the entire premium being taxable, the insured still has to include the "PS-58" costs as income annually.

[Bill Presson]

Isn't it 50% for whole life, but 25% for term, variable, and universal life?

Correct.