Buying Life Insurance from Terminating 401(k) plan

[Mr401kPaul]

I have been out of the retirement plan admin business for a few years and want to run this by the group.  Owner has recently retired and wants to terminate his 401(k) Plan.  The plan owns a life insurance policy (variable life) where the owner/participant is the insured.  He happens to be my brother who was a State Farm Agent.

Can he buy the life insurance for it's fair market value (I realize that may be different than the cash value, but the policies are very mature).  The Prohibited Transaction Exemption is still applicable to this, correct?  He can take personal cash and pay it into the plan as a purchase of the policy - right.  Then he can take his RMD for 2021 (he is over 10 years over his 70 1/2 year and has been taking RMD's every year as required) and then terminate the plan and roll the assets into an IRA.  Upon his death, his much, much younger spouse can rollover his IRA into a Spousal IRA and then wait until 2032 (her 70 1/2 year) to start RMD's.

Am I missing anything?  Have any rules changed on me?

[Bird]

11 hours ago, Mr401kPaul said:

Am I missing anything?

I don't think so.  Any PS-58 costs paid should be recoverable as basis somewhere/somehow.

[Mr401kPaul]

What happened to the old days when Larry S. and Mike P. would have responded in detail within minutes?

 

[Bill Presson]

21 minutes ago, Mr401kPaul said:

What happened to the old days when Larry S. and Mike P. would have responded in detail within minutes?

 

Paul, haven't seen Larry on here in a while. Mike checks in pretty regularly. Also, I sent some info to JD earlier this week on this issue. I think y'all are good to go.

WCP

[Mike Preston]

Isn't the age 72 after 2021?

[Mr401kPaul]

Well, I figured something must have changed in my several years away from reading regs and new legislation - thanks, Mike!  Nice to hear from you.

 

[ErnieG]

Is the owner a self-employed individual?  Any portion of the employer contribution used to purchase insurance for a "self-employed" individual is not a deduction under §404(e).  The self-employed individual does not get to deduct the economic benefit portion of the premium and therefore creates no basis for that individual.  The policy may be purchased at the Fair Market Value (FMV), with no basis applied), and RMDs may begin at 72.

[Bird]

23 hours ago, ErnieG said:

Is the owner a self-employed individual?  Any portion of the employer contribution used to purchase insurance for a "self-employed" individual is not a deduction under §404(e).  The self-employed individual does not get to deduct the economic benefit portion of the premium and therefore creates no basis for that individual.  The policy may be purchased at the Fair Market Value (FMV), with no basis applied), and RMDs may begin at 72.

Agreed/good clarification.