Life Insurance death 1099R reporting

[Rai401k]

Participant in a 401(k) Plan has a life insurance policy and dies. I understand that the difference between the proceeds and the cash surrender value are non-taxable. The beneficiary is getting paid out payments of the cash surrender value how would we report this on the 1099R. Specifically what code do we use? for the tax free portion.  

[ETA Consulting LLC]

I think you'd enter the 'Pure Death' benefit in Box 1 [Total Distribution] and enter '0' in Box 2a [Taxable Amount]; and then enter '4' in Box 7 [Distribution Code].

This would reflect a distribution that is not taxable and is due to death of the participant.

Keep in mind that, pursuant to Section 72(m)(3) that the pure death amount [e.g. the amount of the face value in excess of the cash surrender value] is only tax free to the beneficiary if the taxes on the economic benefit [i.e. PS 58, Table 2001, or One Year Term --- Whatever you decide to call it] was paid each year.

Good Luck!

[Bird]

I'm not sure I understand how much the participant is receiving in cash; I think ETA understood it to be just the pure death benefit.  You said " The beneficiary is getting paid out payments of the cash surrender value..." but I suspect you meant the full death benefit?

Let's say death benefit is $100K, and cash value is $20K...and accumulated PS-58 costs are $3,000 (they are recovered as basis).  All is paid in cash.  $100K is the total, and $17K is the taxable amount (100-20-3).  The bene could roll over $17K, in which case you report $83K as the gross and $0 as taxable...on this 1099-R; the other would be the rollover for $17K.  I imagine there are other monies to be included as well.

[ETA Consulting LLC]

18 minutes ago, Bird said:

Let's say death benefit is $100K, and cash value is $20K...and accumulated PS-58 costs are $3,000 (they are recovered as basis).  All is paid in cash.  $100K is the total, and $17K is the taxable amount (100-20-3).  The bene could roll over $17K, in which case you report $83K as the gross and $0 as taxable...on this 1099-R; the other would be the rollover for $17K.  I imagine there are other monies to be included as well.

In your instance here, the pure death benefit would be $80,000.  It's merely the face value less the cash surrender value (the accrued economic benefit has no bearing).  The economic benefit (e.g. $3,000) was merely the accumulation of the taxes paid each year for the pure insurance.  It's basically telling the participant, "Hey, you are receiving life insurance protection at a cost of X for the year.  There is no income tax deduction on life insurance premiums; so this amount is taxable to you.  If you were to die, then your beneficiary would receive the death benefit proceeds income tax free".  So, $80,000 would be the net amount as risk payout and received income tax free.

Now, your point on the accumulated economic benefit amount ($3,000) has become the subject of endless debate in the pension community.  I can discuss what I believe and why I believe it based on citations, but we'll be talking for the next 3 years.  I had to research every single rule in this area when I headed a Qualified Plan team within a Life Insurance Company :-) 

Good Luck!

[Bird]

I was taught that the accumulated PS-58 costs were basis and have seen several articles  supporting that, like the one attached - see p 471.  "The P.S. 58 cost...is deemed to have been a contribution of the employee for this purpose [determining the tax free amount]."  (Interesting how this stuff is so old that it is scanned from hard copy.)  I'm not sure that I was making separate points...we agree that the at-risk portion in my example is $80000 but I think you are saying the $3000 is not recoverable as basis and I am.  I didn't know it was the subject of endless debate...

Taxation of Life Insurance in Qualified Plans.pdf