PS58 Costs - Insurance in 401(k)

[Cynchbeast]

I have a client that was covered by insurance in his 401k plan. Each year we received a letter from his insurance agent with the PS58 costs (Table 2001) and included that amount on his personal income tax return.

In the middle of 2012 the plan sold the policy for cash -- so as of 12/31/12 there was no insurance policy in the plan.

What do I have to report for the PS58 cost on his tax return? Here are some options

1. Nothing -- because there was no life insurance as of 12/31/12
2. A prorated amount based on the number of days the policy was owned divided by 365
3. It depends on when the premium was actually paid. If paid while still owned by 401k, then a full year’s PS58 cost has to be included --- and if paid after policy sold then nothing to include
4. Other

[ETA Consulting LLC]

I'd say "A", but for a different reason. There really isn't a legal requirement to report this each year. This income is imputed to the participant each year in order to ensure the pure death benefit (calculated as the face amount of the policy less the cash value; aka net amount at risk) gets paid from the plan income tax free. The reference for this is Section 72(m)(3) of IRC. So, I wouldn't have this imputed income as there would be no death benefit needing to be paid from the plan income tax free in the invent the insured dies.

Good Luck!

[DMcGovern]

I think the insurance company (through the agent) would (and should) still issue a letter reporting the "PS58" costs. Even if the policy were held for one day in the year, there was still a death benefit available. And based on how this amount is calculated, there is no method available to pro-rate the amount.