"keyman" life insurance held by ESOP Trust

[Guest svatty]

An ESOP (which was at one time a leveraged ESOP, but has subsequently paid of the acquisition loan) acquired a "keyman" life insurance policy on the principal of the company. The policy then began to have a cash value shortly before the acquisition loan was fully repaid, however the Trust has never allocated any of this cash value to participants ESOP accounts. The cash value of the policy continues to grow.

I believe this should be considered a plan asset, and thus allocated to the participants.

I am curious as to whether any rules exist which would not require such an allocation? Would such rules, if any, only not require such allocation during the leveraged period (while the loan is being repaid with trust assets?).

Any help or references would be extremely helpful.

[This message has been edited by svatty (edited 02-01-2000).]

[RLL]

If the insurance policy is an asset of the ESOP trust and has value, that value must be allocated to participants' accounts at least annually, just as in any other type of defined contribution plan. The fact that the ESOP has been leveraged does not permit having a "suspense account" for an asset other than employer stock.

There is an old revenue ruling (probably from the 1960's or 1970's) in which the IRS set forth its rule that defined contribution plans must annually allocate all trust income and assets to participants' accounts. The "non-allocation" which you've described is a qualification defect under IRC Sec. 401(a), as well as a violation of the ERISA fiduciary rules.

I would also question the propriety of an ESOP's owning keyman life insurance. Is the use of plan assets to pay premiums in the best interest of (and for the exclusive benefit of) ESOP participants? I think this "investment" raises many problems under ERISA's fiduciary rules, even if the cash value gets allocated to participants' accounts. Wouldn't it be better for the keyman policy to be owned by the company?

[This message has been edited by RLL (edited 02-01-2000).]

[Kirk Maldonado]

The citation to the ruling mentioned by RLL is Revenue Ruling 80-155.

For all of the reasons stated by RLL, and a number he did not mention, I believe that any keyman insurance should be held by the employer, not by the plan.

In my experience, the reason why the insurance is held in the plan is so that the premiums can be paid by means of pre-tax contributions to the plan. However, I don't think that this factor outweighs all of the negatives associated with the insurance being held by the plan