Does the incidental benefit rule for life insurance apply to elective

[Guest John Nelson]

Does the incidental benefit rule apply to elective salary deferrals under a 401(k) plan? "Seasoned contributions" (i.e., contributions that have accumulated under the Plan for at least 2 years) under a Profit Sharing Plan can be used to purchase life insurance without regard to the incidental benefit rule. But, this exception is based on the principle that these contributions may be withdrawn from the Plan. Elective salary deferrals, on the other hand, cannot be withdrawn until a distributable event under Code section 401(k)(2)(B) has occurred. Therefore, it would seem that 401(k) salary deferrals are subject to the incidental benefit rule -- even if they're otherwise "seasoned contributions". Any thoughts? Thanks.

[Guest Matt Tuttle]

Yes, 401k elective deferrals are subject to incidental limits. Be careful because unexpected changes in contributions can violate the limits.

Matt Tuttle

203-609-9077

http://www.wealthadvisors.bigstep.com

[Guest czyz]

Originally posted by John Nelson

Does the incidental benefit rule apply to elective salary deferrals under a 401(k) plan?  "Seasoned contributions" (i.e., contributions that have accumulated under the Plan for at least 2 years) under a Profit Sharing Plan can be used to purchase life insurance without regard to the incidental benefit rule.  But, this exception is based on the principle that these contributions may be withdrawn from the Plan.  Elective salary deferrals, on the other hand, cannot be withdrawn until a distributable event under Code section 401(k)(2)(B) has occurred.  Therefore, it would seem that 401(k) salary deferrals are subject to the incidental benefit rule -- even if they're otherwise "seasoned contributions".  Any thoughts?  Thanks.

[Richard Anderson]

You are not withdrawing from the plan, you are using plan funds to purchase an asset that the plan owns (insurance). If you consider this a withdrawal, why would you think that any of the 401(k) account could be used to purchase insurance?