Life insurance in pooled plan

[AnnCK]

I am a financial advisor (used to be a TPA) working with a small company with a pooled 401k account.  The plan sponsor is terminating the plan.  There are 2 life insurance contracts in the plan.  One contract only has a cash value of about $450 so we'll ignore that for this purpose.  The plan has been paying the premiums.  However, the other policy which is on the owner of the business has a cash value of over $200k.  That policy is paid up so no premiums have been paid on it for as long as I have been involved with the plan.  The plan assets are pooled and valued quarterly.  I noticed on the most recent valuation that the account balances that are being reflected and given to participants do not take the insurance into account at all.  In other words, the value shown on the participant statements only equals the value of the plan investments exclusive of the life insurance contracts. Same for the most recent 5500 - no accounting for the life insurance.  The owner wants to take the cash value of his policy and roll it to an IRA.  I feel like the insurance is an investment of the plan and that if it is surrendered, it wouldn't just go to the owner.  But I am not sure on that.. ?   This plan has been in existence since the early 70's.  I don't know if the life insurance premiums for the owner's policy  were paid from plan assets or charged directly against his account.  Does that make a difference on whether the cash value of the policy all goes to him?

thanks for any insight!!

[Bird]

It would be very, very unusual for such a policy to be for the benefit of anyone besides the insured participant. It is possible to buy what is essentially "key man" insurance which is an asset of the pooled account (i.e. proceeds would be shared by all) but I wouldn't generally entertain that as a possibility. If you can find something from way back when that showed it came from the owner's account that would be ideal.*

IMO life insurance CVs should be included in the val reports, including the 5500. I know of some (back in the day) who would show the premiums as an expense and then not include the CVs on the val/5500. (Based on a misunderstanding of what a "fully insured" contract is.)

But going back to the smaller policy, you say premiums are being paid. Are they being taken from that participant's account or treated as an overall "expense" or investment of the plan?

*This whole scenario/description is very worrisome and I have to wonder if it was totally botched.

[Bill Presson]

I wouldn't completely dismiss the possibility of the policy being key man especially in a pooled plan. I do think the existence of the other policy would tend to support that they were intended as individual coverage.

But there has to be something to show that the premiums were taken only from the insureds' accunts.

 

[Belgarath]

I've never seen it in a pooled DC plan. As Bird says, "back in the day" I did see it used occasionally in a DB plan, the theory being that it would provide plan assets in the event of a key person death, ensuring that the plan had sufficient funds to pay promised benefits if the business suffered losses due to the death of the key person.

That was so long ago that I don't believe the lever or the inclined plane had been developed...

[ErnieG]

I agree with Bill, Insurance may be purchased on a participants life as a general trust investment, "key person coverage".  This coverage is for the benefit of all participants and not solely for the benefit of any one participant.  As a general trust investment the cash value would be included as the other investments on the Form 5500 as Bird points out.  Upon the termination of the Plan the life insurance would be allocated per the Plan Document. 

I am assuming that the life insurance is owned by the Plan and the beneciary is also the Plan and would be curious as to why the owner feels he/she is entitled to the cash value.  If the owner has been paying the PS 58 cost it may not be "key person coverage", however, if this is coverage as "key person" there would be no PS 58 cost reported.  I would also like to see any minutes or fiduciary reporting that this investment, in the life insurance, was purchased as a general trust investment.

[Luke Bailey]

Without any paper trail, it's really a toss-up as to whether this as an individually allocated investment, purchased just with the assets of, and for, the owner's account, or a "key person" policy sold by a life insurance agent who couldn't find any other way to sell it. I would advise an adviser such as yourself, AnnCK, that your role would be to ferret out the paper trail, if one exists (they usually do if you dig hard enough) and advise the plan's fiduciary (i.e., the trustee or person who directs the trustee, if the trustee is directed) on what the paper trail indicates, or on the lack of a paper trail, and otherwise to maintain a careful professional distance from the fiduciary's decision. In the event of a DOL investigation, I am sure they would say tie goes to the plan. But again, there's probably evidence one way or the other if you dig hard enough.