1099-R Requirements for Life Insurance Proceeds

[Flyboyjohn]

Yet another example of why not to allow life insurance in qualified plans.

Former employee/participant left behind a life insurance policy and then had the nerve to die.

Since the policy was a special asset our platform recordkeeper wants nothing to do with it.

Proceeds about $200K and CSV about $40,000 so we think the death beneficiary pays tax (or rolls over) the $40K and gets the $160K as tax free life insurance.

Our questions are:

1. Do we issue one 1099-R for just the taxable amount or one 1099-R for the entire amount and just show the $40K as taxable or issue two 1099-Rs for the taxable and non-taxable portions?

2. What IRS codes on whatever 1099-Rs are required?

Thanks.

[Bird]

I think it depends on what the bene elects. If s/he takes it all in cash, then I think only one 1099-R is required, Code 4, and you indicate how much is taxable and how much is tax-free.

If the taxable part is rolled over, then you need two, one for the rollover code 4+H, and one for the tax-free part, code 4, where you report the total distribution and say none is taxable.

What I'm not sure of is if the bene gets to recover accumulated PS-58 costs tax-free as well, as a participant would - I think so; I don't know why not.

[Belgarath]

Yes, the beneficiary can generally exclde the Taxable Term Costs from the otherwise taxable amount over and above the "net insurance proceeds."

So in the example used - of the $40,000 CSV, if $5,000 represented TTC, the taxable distribution would be $35,000.