Life Insurance Proceeds Mysteriously Appear After Death of Participant

[chris]

All:

Participant previously maintained a segregated account in employer's PSP and retired in 2007 at which time distribution of account taken. Participant died earlier in 2014 and Plan has received a check for life insurance proceeds on life of former participant. Prior third party administrator says it has no records from 2007. Employer has scant records as well. Do have statements from participant's segregated account in PSP where premiums were paid on policy. Current third party administrator is saying it will pay out proceeds to former participant's beneficiary named on PSP beneficiary designation if it can be shown with objective facts that life insurance proceeds belong to deceased participant/deceased participant's named beneficiary and not to PSP. Trying to determine places from which can glean information to back up how insurance may have been handled/mishandled at time former participant took distribution of account. Would obtaining copy of Form 5500 help? Considering obtaining participant's income tax return for year in question to see what was reported. Considering leaning on prior third party administrator as well for whatever records they might have "in storage". Insurance policy appears to have been left out altogether at time of distribution as insurance company never received any change of ownership/change of beneficiary form. Again, looking for ways to objectively show how policy was handled/not handled at time of distribution. Any help/advice appreciated.

[Lou S.]

Have you tried getting a copy of the policy from the insurer?

[Bill Presson]

If the policy was set up correctly, I don't think the policy will really give a clue. It would have the owner and beneficiary of the policy as the plan whether it was key man or purchased for an individual account.

However, the OP says the participant's segregated account shows the premiums. Unless the rest of the accounts also showed premiums, then wouldn't that be your answer??

[chris]

Lou:

Insurance company cut the check based on their records as to who was to receive the proceeds. Their records show Plan was owner and beneficiary of the policy.

Bill:

I am in agreement as to if premiums are shown being drafted out of participant's segregated account, then participant was paying for the policy inside the Plan and thus the proceeds belong to participant/participant's account. But issue is that some parties believe it may be possible that participant obtained the economic benefit associated with the policy upon participant's taking distribution out of Plan in 2007 and that snafu was just not notifying the insurer.

I am not steeped in knowledge as to the literal reporting aspects... but might there any notation on the 1099-R for year of distribution that would reveal whether or not insurance was in the mix? Would participant's individual income tax return covering year of distribution reveal reporting as to the insurance aspect of the distribution if in fact participant received any such benefit? Was considering filing a Form 4506 with the IRS to obtain a copy of participant's prior return and will look to see if there is a similar form in the 4506 series for the Form 5500 for the Plan. Again, looking for objective ways to show that participant got nothing at time of distribution associated with the policy.

Thanks for your replies.

[Bird]

I doubt the participant got an economic benefit in lieu of the policy; it's possible the participant got (or was supposed to get) the policy itself as part of his distribution, in which case, the proceeds would go to his (policy) beneficiary, not the beneficiary under the plan. But there was no change to the policy beneficiary, so it is in fact the plan. I suspect at the end of the day, running it through the plan will get the money to the intended beneficiary; there might be some differences in taxation (good luck figuring out how much is taxable).

If other money was rolled over and the insurance policy was taken as a taxable distribution, that would show on the 1099-R(s). Odds are that didn't happen b/c it would likely have been a large amount. The participant might have bought the policy and rolled over the purchase price along with other plan assets but again, that's unlikely b/c it would be a large amount.

(Interesting that "...Plan has received a check..." - seems like someone must have filed a claim, no?)

Another reason not to have life insurance in plans!

Just curious, chris, what is your role?

[chris]

Bird:

I am assisting with the estate administration for the deceased participant. All parties I think are of the mind that the policy just did not get addressed, however, third party administrator wants proof of where the monies are supposed to go. I believe the third party admnistrator is reluctant as neither this participant nor the corresponding policy showed up on any Plan info they received when they took over administration in subsequent year. Thank you for your info re potential tax angles. Looks like obtaining deceased participant's tax return for the year distribution was taken may help somewhat if only to compare the dollar amount on the 1099-R versus the then value of the policy and other assets in participant's account. I will probably also contact the prior third party administrator as well and see if they cannot pull their records to help out.... Thanks

[Bird]

You're welcome and good luck. I don't blame the new TPA for being cautious, what with no info whatsoever until the money appears. But...they're involved and will have to make a decision. Maybe waivers from the various parties and potential parties in interest would make their decision easier. Keep us posted.

[Bill Presson]

Who applied for the death benefit?

[chris]

Bill:

My understanding is that the Plan did so. I assume that the insurance agent notified the Plan once he learned participant was deceased and the appropriate paperwork was completed.

Bird:

Probably heading where you have described, ie, waivers/releases, and would seem that if Plan Trustees and Employer are comfortable that insurance monies are to flow to the deceased participant's account, then TPA would go along with their instructions. We will see how it shakes out once we gather all the records we can find....

Thanks for all replies.

[chris]

Just now heard back from TPA after months of silence. TPA willing to do amended 5500s to reflect the insurance, but wants to know how to reflect the adjustment of assets on the first amended 5500 -- either as a contribution or as earnings. Appears to me that referencing the value of the life insurance policy as "contributions" would call into question the §415© limit especially since the then cash value of the policy was a few hundred thousand dollars. Thus, appears that "earnings" would be the better route if those are my only two choices.

The other issue raised is how far back to go to amend as it appears that the policy may never have been included on any 5500. The policy was issued in the mid-80's. The initial thought was to amend the 2007 5500 to include the life insurance policy going forward (since it was left inside Plan) and not to address years prior. While textbook approach may be to go all the way back to mid-80's to amend I believe starting with 2007 5500 probably the more practical approach.

[Bird]

I'd call any kind of adjustment like that "other income" (which is where earnings go, so effectively, earnings).

One might ask what difference it makes to amend returns starting in 2007 (or earlier) knowing that the first year is a fudge no matter when you do it, and just showing the proceeds in the year received. Depends on what the TPA is comfortable with (and I guess there is plenty of money to pay fees ).

[hr for me]

May be a bit simplistic, but why wouldn't the proceeds be considered earnings in 2014 when the participant died and the insurance was paid out rather than the years the premiums were paid? Was the value of the policy the same over the whole time period or were there any stipulations that it wouldn't be paid out until after a certain date?

You might check this posting: 5500 : reporting life insurance premiums under Exec Comp 5500 on this board. It talks about where to put the insurance premiums on the 5500 each year and differing views. I can't seem to put a direct link though....

[chris]

Bird:

I believe the TPA was uncomfortable with just showing the death proceeds in 2014 and then having the payment made out of the Plan to the beneficiary because the participant upon whom the insurance was based was supposedly paid out in full back in 2006. Thus, going back to the first year after the year in which participant was paid out in full to show that, in fact, participant still had an asset inside the Plan, i.e., the life insurance policy. Accordingly, when payment made of the death benefit everyone can point to where it came from.

hr for me:

The policy's cash value was building up over time. TPA looking to include it somewhere on the 2007 5500 and bring it forward so that ultimate distribution of death benefit will not be entirely out of left field...

[Bird]

That's reasonable.

[chris]

Bird:

To follow up on your second point above in your post on Sept 10. The TPA reviewed the 5500 for the year of distribution and there is a $1.00 amount shown as "other investments" at beginning and then $0.00 shown at year end. TPA believes that is the insurance policy and that it was considered distributed. Obviously, value was much more than $1.00. However, giving some thought to just showing the proceeds on the 5500 for year of receipt and then showing them distributed out to the participant's beneficiary. I would assume some limited info can be on the 5500 to explain as needed. However, I don't file 5500s so may not be that easy.

[GBurns]

Chris;

I think that you should give the points raised by hr for me some thought. I do not recall that the Cash Value of LI policies are reported on 5500s or anywhere, however, premiums, death benefits and distributions are.

[chris]

GBurns: That was sort of where I was headed in terms reflecting the proceeds on the 2014 5500 and then showing the same being paid out on the 2015 5500... I believe premiums were paid up in 2006.

[SFSD]

Life insurance cash values are considered plan assets and should have been reported on 5500's.

[GBurns]

Doesn't that depend on the type of insurance policy and its "investment account type" such as allocated, unallocated or pooled? IUL, VUL, VL, GVA and others have pooled separate accounts. If the cash value is part of the insurance company's general assets and therefore subject to its creditors, How can it be treated as a plan asset?

From previous discussions:

http://benefitslink.com/boards/index.php/topic/30274-reporting-cash-value-of-life-insurance-policy-in-retirement-plan/

http://benefitslink.com/boards/index.php/topic/15630-question-on-schedule-i-financial-information/

http://benefitslink.com/boards/index.php/topic/21010-ins-cash-value-reported-on-the-5500/