Getting insurance out of a db plan

[Bird]

New client has a DB plan that is in the process of being terminated. It has a large ($100K interpolated terminal reserve) insurance policy on the owner that he wants to keep, but wants to get out of the plan.

I suggested the plan borrow, say, $90K out of the policy, and then he personally buy the remaining $10K value. Someone from the home office says...

"I have heard of taking a loan then buying for a reduced cost from the plan...only in a PS plan and has to be paid back within a certain amount of time or its deemed income."

I could be wrong; having less and less to do with DBs all the time. But I kinda figured upon plan termination, just about anything would be fair game. And the second sentence makes me think the guy doesn't really know anything.

Any thoughts/comments? We are setting up a 401(k) plan and could roll over the policy along with other assets, but really don't want to do that and delay the inevitable and make it worse. (I suppose if there is some restriction on doing this within a DB we could do the rollover and then borrow once it is in the 401(k)).

[Belgarath]

Like you, it has been a while since I was involved in anything like this. However, I'm of the opinion that there shouldn't be a problem with what you propose (assuming it isn't a 412(e)(3) plan that prohibits policy loans, and assuming the terms of the plan don't otherwise prohibit it). Typically the loan and absolute assignment of ownership would take place on consecutive days (most insurance companies would have to run overnight file maintenance to get updated values following the loan.)

I'm unaware of any guidance restricting this to profit sharing plans only.

[Effen]

Just make sure you give all the other employees the same opportunity.

What is the point of borrowing from a plan that is being terminated? Who will hold the loan once the plan is gone? Seems like a lot of work for a little gain. Won't he have to repay the loan in order to distribute the assets?

[Belgarath]

Hi Effen - this is a policy loan, as opposed to a participant loan. The Plan Trustee takes the policy loan, and the loan proceeds simply remain in the plan as part of the plan assets, and are then distributed with all other plan assets according to the terms of the plan. The policy is assigned to the participant as a distribution, and the participant now owns an insurance policy (outside the plan) with an outstanding loan against it, which may or may not be desirable - this should be considered appropriately prior to this whole transaction ever being initiated in the first place.

[Bird]

Thanks all.

(FWIW...it's one thing for us to brainstorm here and say "I think..." but I find it rather irritating that someone from a home office just spits out bad info without giving it a second thought. Not all that surprised though.)