Distribution of Insurance in 401(k)

[MjInvestments]

HI I am working on closing a 401(K) plan as two companies merge and move to a single plan.

In the plan that is closing there are two life insurance policies owned by the plan on one of the employees.  The employee, who is retired, wants to take the cash surrender value of the insurance and receive it and then invest with his financial advisor.

Who pays the taxes on the insurance policies as they are distributed - the insured (Retired Employee) or the plan who owns the policy but is liquidating it and sending to the employee.

[K2]

I have a hard time imagining a scenario where it is other than the insured.  

[Bill Presson]

Agree with kcbirm. I would be curious if anyone can even come up with a scenario where a tax exempt trust/plan would pay a participant's taxes.

Edited to add: if the policy is being liquidated and the value distributed, then there isn't a >distribution of insurance".

It's just a distribution.

[ESOP Guy]

I am assuming this is a balance forward plan. If it is an individual directed account plan I don't see how this is even a question.

What I can tell you if for example X was getting 100% of the insurance proceeds and my account was taking a hit to pay taxes on those funds (and I figured out that was happening which might be hard) I would be an unhappy camper. 

This really strikes me as an individual account investment within an otherwise balance forward plan and the individual account holder takes 100% of the good and bad.  They get the proceeds but pays the tax also.  Any other treatment seems illogical and inconstant.  I have never seen the benefits of an investment go to one person and the costs of that investment go to a group.