Life Insurance Premiums - Outside Assets

[Gruegen]

Is it a prohibited transaction to pay life insurance premiums (for a policy held within a defined contribution plan) with personal assets?

[Bill Presson]

Is it a prohibited transaction to pay life insurance premiums (for a policy held within a defined contribution plan) with personal assets?

Yes, unless it's purchased out of the plan first.

[Belgarath]

I agree, but let's stretch this a bit. Is it, for example, a one-person self-employed plan, and the self-employed person writes two checks - one for 20,000 to the insurance company to pay the premium, and one for 30,000 to the fund, but counts and deducts both of them as a 50,000 plan contribution? (minus the TTC, of course)

If so, while not the recommended or cleanest way to do it, I doubt the IRS would object. I've seen a lot of plans operate this way in a prior life, with nary a problem. Mind you, doesn't mean I'd recommend this!

[12AX7]

Belgarath, why would there be an issue of deduction for the one person plan in your hypothetical example? Are you perhaps saying that the premium is to be expensed from the plan?

[ETA Consulting LLC]

This becomes an "apples and oranges" issue very quickly.

We agree that "IF" you fund a premium for an asset of the plan, then that is a contribution to the plan. "HOWEVER", if the premium is funded to a "self-employed" individual (e.g. sole proprietorship or Partnership, etc...), then there is no deduction allowed on the contribution used to fund that premium and no tracking of Table 2001 (or any economic benefit basis) for that individual.

We must be careful to keep these two issues separate when we communicate; because it can get confusing very quickly.

Good Luck!

[Belgarath]

Arguably, to be deductible, it would need to be paid directly to the plan - there is a school of thought that says if it is simply paid directly to the insurance company, albeit to a policy owned by the plan, that it isn't a plan contribution. As I said, I've never seen it questioned, but my recommendation is always to have all contributions paid to the Trustee of the plan, who then disburses the funds accordingly. This also, for purely practical reasons, makes tracking of contributions easier.

As to the deduction, the TTC for an unincorporated owner is not deductible. The balance of the premium is deductible. So if you contribute 50,000, of which 20,000 is insurance premium, and there is $1,000 TTC, then the owner only DEDUCTS $49,000 on his 1040. (This is different for the common law employees, if any). And as ETK observed, this TTC is not recoverable at a later date as basis for the unincorporated owner.