Who should be the beneficiary of a life insurance policy in a profit sharing plan

[katieinny]

I've often read articles about how much insurance can be in a plan, how PS 58 costs are handled, etc., but this is the first time I've run into a case where a participant actually died with a life insurance policy in the plan. I don't know any details about whose idea it was, how the premiums were paid, etc. What I do know is that the spouse expected to receive the proceeds from the policy, but instead they were paid to either to the employer or the plan (that's still being sorted out, I guess). So it seems that somebody didn't set up the policy correctly. If she had been the beneficiary, at least some of the proceeds would have come out to her tax free. If the proceeds went into the plan, I'm thinking that she will still get the proceeds, but they will have to be rolled over to keep them tax deferred, but ultimately tax will be paid at some point. If the employer was the beneficiary, she'll never see a dime.

I guess the choice of beneficiary is determined by who is putting the policy in place. If it's the employer, the employer is expecting to get a benefit when the participant dies, so the employer is named as beneficiary. If it's the participant, he or she is probably expecting a loved one to get the benefit, who, hopefully, will not have to pay tax on the entire distribution.

I would like to get some feedback from my peers on life insurance beneficiary designations when the policy is in a qualified plan. Since I mostly deal with deferred compensation plans, let's stick with those. Thanks for your help.

[MoJo]

If the employer was the beneficiary, she'll never see a dime.

I guess the choice of beneficiary is determined by who is putting the policy in place. If it's the employer, the employer is expecting to get a benefit when the participant dies, so the employer is named as beneficiary. If it's the participant, he or she is probably expecting a loved one to get the benefit, who, hopefully, will not have to pay tax on the entire distribution.

Just my 2 cents worth: If the policy was a plan asset, and the employer is the beneficiary, I think there are bigger problems regardless of who set it up.... Having an "employee" benefit plan "investment" pay off to the employer (with a surviving spouse) probably is a PT, a violation of provisions of REA, and I would argue a breach of fiduciary duties (specifically, teh "exclusive benefit rule."

[A Shot in the Dark]

K:

Typically the beneficiary for life insurance held by the plan on behalf of a plan participant is the plan trust/trustee.

In the case of the death of the plan participant, the death benefit proceeds would be paid to the trust.

The trust would then pay the death benefits along with any other plan balance to the beneficiary of the plan participant.

The PS 58 costs and reporting or non reporting, becomes part of the income tax calculation.

[Bird]

It is proper for the plan to be the beneficiary of the policy. The participant's plan beneficiary designation will then funnel the proceeds to the beneficiary. The at-risk portion is tax-free and that flows through to the bene so there's no loss of that benefit.

[katieinny]

Okay! Especially good news that the tax-free benefit is not lost even if the assets have to pass through the plan before getting to the spouse. Thanks for definitively answering the "who should the beneficiary be" question. Now, we'll have to find out if the check was payable to the employer or the plan -- and if to the ER, is there a PT as MoJo suggested. I hadn't thought of that possibility.

[SFSD]

Believe you mentioned you do not know who was paying the premiums on the life insurance. Assuming it was indeed a plan asset, the plan should have been paying them and debiting the payments to the participant's account. The plan trustee(s) should have been both the owner and beneficiary of the policy.

If the employer claimed the proceeds, it's possible the policy was purchased by the employer who named itself as owner and beneficiary. It isn't all that unusual for insurance to be used for business purposes.

You need to look into these questions.

The insurance company home office should be able to help if necessary by providing a copy of the application for the insurance and copies of any ownership and/or beneficiary changes.

Hope this helps.

[MoJo]

If the employer claimed the proceeds, it's possible the policy was purchased by the employer who named itself as owner and beneficiary. It isn't all that unusual for insurance to be used for business purposes.

True - but if it were an employer purchased asset, it has no business being in the plan. Either it is an employer asset *or* a plan assert, but not both. Companies do often purchase insurance on employees (e.g. Key Person insurance, insurance for purposes of liquidating an ownership interest on death, and for other reasons) - but those are corporate owned, and not plan/trust owned.

[Guest patcassidy]

In such cases, the plan receives benefits from the life insurance policy and accordingly doles the money out to the beneficiary tax-free in whatever portions were decided on. It would be unusual for the policy to be a corporate asset, as More suggested. Plans are unlikely to be set up that way.

Pat Cassidy
Disclaimer: I work for AccuQuote and this is my personal opinion.