Life insurance distribution and rollover

[R. Butler]

Participant has life insurance. Participant terminates and ownership is transferred to him. (There were probably better ways to handle the insurance, but it is done & we can't revisit that decision at this point.) He has elected to rollover the rest of his money. Generally tax is withheld on based on the value of the insurance. Since he has elected to rollover his other investment money is there a legitimate argument to forgo the 20% withholding that is based on the life insurance? I know that it is a taxable distribution, but many vendors will not withhold on outstanding loan balances when the other assets are rolled over. This is somewhat akin.

Thank in advance for any guidance.

[Bill Presson]

Since he didn't receive a distribution of cash, only property, withholding is not required.

[ETA Consulting LLC]

Actually, the life insurance (unlike loans) is not exempted from the 20% required withholding under IRC Section 3405. So, you must find the cash from somewhere.

Good Luck!

[Bill Presson]

Actually, the life insurance (unlike loans) is not exempted from the 20% required withholding under IRC Section 3405. So, you must find the cash from somewhere.

Good Luck!

But a life insurance policy is not an eligible rollover distribution, correct?

[ETA Consulting LLC]

It is 'eligible' for rollover; just not to an IRA. The life policy 'may' be liquidated in the plan and those proceeds may be rolled over or the policy may be rolled over to another qualified plan. So, there is no restriction against rolling it over. The only restriction is that you cannot have a life insurance policy in the IRA.

Your position was 'partially' correct: that because it was a cashless distribution it was exempted from withholding. The issue is that not all non-cash items distributed from the plan would be exempted from the withholding requirements. Life Insurance is the item that is not exempted, but a participant loan (or non-transferrable annuity) would be exempt.

Good Luck!

[Bird]

I thought I responded to this last week but maybe forgot to "post." Anyway, I thought then that WH was not required, and still think so, but guess I need to prove it...here are (I think) the two key Q&As from the reg cited below, with my emphasis. The only problem I have with this is the underlined phrase "...property that is not includible in a designated distribution." "Not part of" I guess...it's separate so I think it's not "part" of it. Anyway, I believe this says WH is not required when everything except the annuity (or insurance) is rolled over.

Sec. 35.3405-1T Questions and answers relating to withholding on pensions, annuities, and certain other deferred income (temporary regulations)

a–4. Q. What is a commercial annuity for purposes of the new withholding rules?

A. A commercial annuity is an annuity, endowment, or life insurance contract issued by an insurance company licensed to do business under the laws of any State. See, also, question f–21.

f–2. Q. How is withholding accomplished if a payee receives only property other than employer securities?

A. A payor or plan administrator must satisfy the obligation to withhold on distributions of property other than employer securities even if this requires selling all or part of the property and distributing the cash remaining after Federal income tax is withheld. However, the payor or plan administrator may instead permit the payee to remit to the payor or plan administrator sufficient cash to satisfy the withholding obligation. Additionally, if a distribution of property other than cash includes property that is not includible in a designated distribution, such as the distribution of U.S. Savings Bonds or an annuity contract, such property need not be sold or redeemed to meet any withholding obligation.