PS 58 Cost and inservice distributions

[Jester]

I have a participant in a 401(k) plan with life insurance who has cumulative PS58 costs.  The person is age 75 and would like to take his nontaxable PS58 cost out as an in-service distribution.  Can that be done?

The life insurance is still effective and PS58 cost is still being calculated and taxed annually.  Taxable RMD is also being taken as required.

 

[Belgarath]

Going from memory, no. Basis recovery for Taxable Term costs can only be used if the policy is distributed to the participant, or surrendered by the trustee.

However, caveat emptor - it has been a LONG time since I had any dealings with life insurance in qualified plans. You will hopefully get a response from someone more in tune with this.

[Bill Presson]

Belgarath is correct. Also, check the plan document: some of them require the insurance to be surrendered or distributed at normal retirement age.

[Jester]

Thank you for the responses.  I was kind of thinking that, but wanted someone to agree with me   I will take a look at the document with regard to life insurance after NRA.

[ErnieG]

Basis follows the contract.  A beneficiary may recoup basis or it may be recovered as Belgarath stated upon policy distrituion or policy sale.  Refer to Treas. Reg. Section 1-72-16(b)(4), "The amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of paragraph (a)(3) of § 1.72-2) providing the life insurance protection. However, if under the rules of this paragraph an owner-employee is required to include any amounts in his gross income, such amounts shall not in any case be treated as part of his investment in the contract."

[Liz Hallam]

"PS-58" costs are imputed income - not cash income - there's nothing to distribute. It's a reporting amount dependent on how participant takes insurance contract. At death, no "basis" rather amount "ar risk" (pure death benefit) is received by beneficiary income-tax free.