Insurance Policy on Terminated Employee in Plan

[PensionPro]

Seems like a simple question ...

if a plan purchases a policy covering a plan participant with the plan as the beneficiary, what happens when the participant terminates employment?

Thank you!

[mphs77]

If the participant does not take the policy as part of their distribution, wouldn't the Trustee surrender the policy?

[Bird]

It's the participant's option to 1) take the policy in-kind as part of a distribution (cash value is taxable), 2) surrender it within the plan and take the proceeds along with the rest of the money, or 3) leave everything alone for a while and revisit 1) and 2) later.

It helps to think of a policy as any other self-directed investment (whether the rest of the plan is self-directed or not).

[My 2 cents]

Seems like a simple question ...

if a plan purchases a policy covering a plan participant with the plan as the beneficiary, what happens when the participant terminates employment?

Thank you!

Isn't that the kind of policy where the participant can buy the policy from the plan by paying the plan the policy's cash value? This is not normal insurance - if the participant dies, the money does not go to the participant's beneficiary but to the plan (think "key man insurance", if that term is still being used; probably should have been changed to "key employee insurance" by now). The plan, by setting the policy up so the plan itself receives any proceeds, owns the policy lock, stock and barrel. It does not appear that the policy exists for the benefit of the employee.

Pension Pro - the basic question (as always) is "What does the plan say?"

[Bird]

Seems like a simple question ...

if a plan purchases a policy covering a plan participant with the plan as the beneficiary, what happens when the participant terminates employment?

Thank you!

Isn't that the kind of policy where the participant can buy the policy from the plan by paying the plan the policy's cash value? This is not normal insurance - if the participant dies, the money does not go to the participant's beneficiary but to the plan (think "key man insurance", if that term is still being used; probably should have been changed to "key employee insurance" by now). The plan, by setting the policy up so the plan itself receives any proceeds, owns the policy lock, stock and barrel. It does not appear that the policy exists for the benefit of the employee.

I agree that there is an additional option to what I cited - buying the policy.

I almost went into a discussion about the possibility of it being key man life insurance, because of the way the question was posed, but since that would be rare, thought I wouldn't go there. It is a (remote) possibility. But if a participant has a policy in a plan, it is properly set up with the plan as owner as beneficiary, even if it is strictly for that participant (or beneficiaries of the participant).

[PensionPro]

There are only two participants in the plan - husband and wife. Husband and wife split in a nasty divorce. The husband terminates employment and takes his portion of the funds from the plan. However, he leaves the life insurance policy in the plan. The policy covers him with the plan as beneficiary/owner.

It seems the distribution was done incorrectly. He should have (a) taken an in-kind distribution of the policy, or (b) surrendered the policy within the plan and taken a distribution of the funds.

Here we are now, there is the life insurance policy in the plan covering a terminated employee (who was paid out his benefits in full from other assets). Is there any good option at this point other than surrendering the policy and those funds coming into the plan? Can the ex-wife buy the policy from the plan?

The plan assets are trustee-directed and the plan allows life insurance. Thanks for any help!

[PensionPro]

Update: seems the plan could sell the policy under PTE 92-6

[Bird]

Honestly, I think you have to figure out what should have happened, and recreate records to bring things forward to today and there shouldn't really be any questions. Either he got paid fully and isn't owed money, or he didn't get paid fully and is owed money.

When you say he "...was paid out his benefits in full from other assets" what do you mean? He got his share of the "side fund"? Or...and I'm getting this vague sense...the initial purchase was FUBAR'd and never taken from "his" assets so the policy was just another commingled asset? If the latter, and IF the policy cash surrender value was included in the value of all assets when they were split, then it's simple - it stayed in the plan and belongs to the remaining participant. Should probably be surrendered, unless he has health issues, then the cash is just another asset of the plan - as the insurance policy is now. But I'm making some assumptions...

[PensionPro]

Yes your assumptions are correct. The value of the policy cash surrender value was included in his benefits. The benefits were however paid from other (commingled) assets. So he got fully paid and there is no money owed him from the plan.

At this point, the two options are (a) the plan surrenders the policy, and that cash becomes plan asset, or (b) the plan sells the policy if the conditions of PTE 92-6 are met.

Am I missing something? Thanks for the insight!!!

[Bird]

Sounds like you got it. Good luck.