PLAN TERMINATION WITH LIFE INSURANCE

[Riley Britton]

I have a one person plan (401k/PS) terminating  20201231 with life insurance.  He has assets at 2 other investment houses.  He cashed in his life insurance policy ($42,000) and now wants to roll it into the IRA along with the assets from the other investment houses.  I don't think you can do that, correct? What are his options now as far as the life insurance cash? He doesn't want a tax liability. Fidelity (one of his investment houses)  told him to send them a check and mark it 60 day rollover along with a 1099R ... 

[shERPA]

Why not?

[david rigby]

I'm confused.  Why are you involved with his rollover?

[Bird]

Who/what was the life insurance proceeds payable to, and where is the money now?

[Riley Britton]

I'm not involved with his rollover, he just asked me advice.  The life insurance proceeds were payable to him and he has a check from his insurance company.  My question was can he rollover the proceeds to an IRA along with his other assets and from research I thought the answer was no.  If it is no, then what does he do with it? 

[shERPA]

If the life insurance was properly owned by the plan (a BIG if), then the payout from the insurance company should have been payable to the plan trustee fbo the plan.  Maybe the owner is also the trustee, in which case it was "payable to him" as trustee.  So it represents plan assets, part of his plan account balance, and is eligible for rollover.  

If the policy was not properly owned by the plan then there are perhaps a number of problems, the rollover aspect just being one of them.  

[Riley Britton]

36 minutes ago, shERPA said:

If the life insurance was properly owned by the plan (a BIG if), then the payout from the insurance company should have been payable to the plan trustee fbo the plan.  Maybe the owner is also the trustee, in which case it was "payable to him" as trustee.  So it represents plan assets, part of his plan account balance, and is eligible for rollover.  

If the policy was not properly owned by the plan then there are perhaps a number of problems, the rollover aspect just being one of them.  

Yes, the owner is the trustee  -- he is the only person.  Thank you! 

[Bill Presson]

7 minutes ago, Riley Britton said:

Yes, the owner is the trustee  -- he is the only person.  Thank you! 

That's not what shERPA said. The PLAN was supposed to be the owner and the check payable to the Trustee of the plan. If the owner of the policy was the participant, that means the policy was never actually part of the plan. That is an issue.

[Riley Britton]

3 hours ago, Bill Presson said:

That's not what shERPA said. The PLAN was supposed to be the owner and the check payable to the Trustee of the plan. If the owner of the policy was the participant, that means the policy was never actually part of the plan. That is an issue.

My reply was just  that the owner is the trustee. But yes, the owner of the policy was the plan. The check was payable to the trustee. The policy was part of the plan assets. 

[Bill Presson]

3 hours ago, Riley Britton said:

My reply was just  that the owner is the trustee. But yes, the owner of the policy was the plan. The check was payable to the trustee. The policy was part of the plan assets. 

Excellent.

[Bird]

This is not a complete list but here are some thoughts:

• it sounds like the life insurance proceeds are in a plan checking account*
• he can definitely roll that into an IRA.  It is NOT a 60 day rollover; it is a DIRECT rollover - no surprise that Fidelity would give erroneous advice.
• IF he paid taxes on PS-58 costs while the policy was in the plan (or was a sole prop and did not deduct them**), he gets to recover those cumulative PS-58s tax free.  In that case, he should be paid cash for those cumulative costs, and should get a 1099-R showing $0 taxable amount.  The rest could be rolled over.

*But somehow I doubt it.  Odds are pretty good that this is broken and not fixable with free advice on a bulletin board.

Are you a TPA, broker or what?

**EDIT - I was politely corrected off-line.  Apparently a sole prop cannot recover PS-58s.