Life Insurance in a 401k plan- CSV reported or not

[cpc0506]

Our TPA firm just took over a book of business from an advisor. He had life insurance in every defined contribution plan, even though it seems that only the owners have the policies. (Why that is so is still to be determined.) We only had a handful of plans with life insurance up to this point. Now we, as a TPA firm, are trying to set policy for how life insurance is handled in our clients' plans.

In doing some research, I have read conflicting approaches on how the life insurance is to be reported OR NOT reported as assets on the financials and the Form 5500. We have always reported the cash surrender value in our assets and on the Form 5500. Interestingly we don't have any audited plans with insurance but in reviewing the lines of the Schedule H I was not able to see where you would include the CSV. I do have to say what research I did find was very limited.

I would like to start a dialogue here to learn how other TPAs handle life insurance in the retirement plans that they administer. If you have recommendations for reading matters that would be appreciated as well.

Besides the CSV issue, we would also like to know what actions you take regarding terminated participants who have life insurance polices as part of their investment lineup. Must something be done with the policy when a distributable event occurs such as termination or retirement?

Thanks in advance for any guidance that comes this way.

[Bird]

I think it is appropriate to report insurance cash values as assets. Without looking anything up, I think there are parts of the instructions that talk about contracts with insurance companies that do NOT require reporting, but that is where a plan is offloading liabilities, e.g. buying an annuity contract.

In real life, purchasing a life insurance contract in a plan is absolutely just a transfer from one asset to another - the policy will happen to have little or no value at the end of the first year, but so be it. For anyone who thinks they shouldn't be reported, then the question is: suppose the insurance policy is surrendered and the money is invested elsewhere, how do you report that sudden influx of money?

As far as what to do with a policy for a participant entitled to a distribution, now you will experience why insurance in a plan is so bad - policies effectively get trapped. If the participant wants to keep the policy, and they take it as a distribution, the cash value is taxable (minus accumulated PS-58 costs, if anyone was keeping track of that). They could just surrender it and roll over the proceeds. They can buy the policy if they have cash sitting around, and the money that was used to pay for the policy can be rolled over. Or they can borrow most of the money out of the policy (the loan proceeds become part of the rest of the account and can be rolled over) and then take the stripped-out policy as a taxable distribution (maybe the cum PS-58s will cover some or all of it) or buy it for the reduced cash value. Either way you wind up doing a lot of work...

[Flyboyjohn]

I'd like to add to the topics to be discussed in this thread the annual 1099-R reporting of the term insurance value (PS58 cost). I contend the life insurance company should be

responsible since they know the policy is owned by a qualified plan and sometimes they do but often they don't. Do practitioners routinely issue the 1099-Rs or is it one of those pesky items that generally slips through the cracks?

[rcline46]

IMNSHO - the insurance salesman should be responsible for ALL of the items mentioned by BIRD, the agent is the one who made all of the commission!

[ESOP Guy]

I'd like to add to the topics to be discussed in this thread the annual 1099-R reporting of the term insurance value (PS58 cost). I contend the life insurance company should be

responsible since they know the policy is owned by a qualified plan and sometimes they do but often they don't. Do practitioners routinely issue the 1099-Rs or is it one of those pesky items that generally slips through the cracks?

It has been a while since I worked with plans with life insurance in it. But when I did I never saw a insurance company that issued the 1099-Rs for the PS58 costs. Not only did we as the TPA have to issue the 1099-Rs but we had to often times fight with the insurance company to get the PS58 costs from them. We worked on our clients to work on the agent who sold the plans to them to do the footwork on getting the PS58 cost with mixed results.

[Doghouse]

That is why many TPA's have significant extra charges for plans with life insurance.

[GBurns]

Bird

Regarding a "sudden influx of money".

If the premiums payments were reported, What did they purchase? How was this recorded? How was the expense offset?

And Since it is "just a transfer from one asset to another"

If the asset was instead shares in a Mutual Fund Do you report the redemption value ( aka CSV) of the shares each year?

[Bird]

GBurns, I'm not sure what you are asking but we effectively treat insurance just like any other asset:

If BOY value = $1000

Premiums = $500

EOY value = $1400

then there was a $100 loss.

Yes we use CSV for mutual funds (not that we see B shares any more) and annuities.

[GBurns]

Bird

How do you account for the "sudden influx of money" that comes from a Death Benefit? There is no connection between the CSV and Premiums which you would have recorded and the DB.

[Bird]

How do you account for the "sudden influx of money" that comes from a Death Benefit?

We'd show it as a gain - don't recall if it has ever happened in our plans but that's effectively what it is.

(My comment about a "sudden influx of money" was about how, if someone had NOT been showing CSVs as a plan asset and the policy is surrendered and money comes back into other assets, that presents a reporting issue.)