Can ESOP own life insurance on a Key EE?

[katieinny]

I've been looking through the BNA portfolio on ESOPs to see if there's any mention about an ESOP owning life insurance on a Key EE, but so far no luck. Does anyone have any experience with this?

[ESOP Guy]

I have seen it done. I don't think it is a very good method. It raises a number of issues. 1) Fiduciary: Is this really the best use of the assets? Is it for the benefit for the participants or the sponsor? (After all it is often times used to stop the sponsor from having a cash crunch if the big balance guy dies- the sponsor seems to be mainly benefiting here.) 2) It is a plan assets so every year you allocate the increase in CSV simple enough. How do you allocate the death benefit? Based on cash value before death? Compensation? 3) Do you really want to reallocate all the shares the benefit is used to pay all in one year? Kind of a lucky windfall for the people in the plan that year, including terms who might share if you allocate the death benefit on CSV.

More common is for the sponsor to hold a policy outside of the plan and use the death benefit to make a contribution/loan to the plan/buy the stock and put into treasury. If the balance is very large the loan allow one to spread the allocation over a good number year and stops the windfall issue. That would happen also if you buy the stock to treasury and contribute the stock back over the years.

The increase in the CSV grows tax free, the death benefit is tax free.

You go to a NCEO conference or an ESOP conference and there are a number of insurance people there who will gladly sell you the insurance and set it all up for thier nice commission.

[katieinny]

Hmmm, I see your point. We'll have to think about this a bit. Thank you.

[Guest vsaper]

The better approach is to have the employer purchase the life insurance. If the key employee dies the employer can use the proceeds to purchase the key employee's stock or the employer can loan the proceeds to the ESOP which can then purchase the stock.

[RLL]

The prior comments are right on point. It's a bad idea ... Often a gimmick used to sell "tax deductible" life insurance. Lots of potential ERISA fiduciary issues, as well as various administrative problems. Don't do it!