Life Insurance Rollovers

[401k Conundrums]

A plan has life insurance contracts, mostly whole life, with very sizeable cash values.  A participant that is well beyond RMD age is planning to retire this year.  To date, no portion of the  Life insurance has been swapped out.  Participant will continue to do some consulting and have continuing 1099 income.  Financial advisor wants to pitch the idea of rolling over the life insurance policy in-kind into a solo-K for the participant (along with the other plan assets), so that life insurance policy can continue.  It is my understanding that life insurance can be rolled over in-kind as long as the distributing plan allows (which is does) and the new plan allows for life insurance (it will be drafted as such).  It is also my understanding that rollovers do not count toward the incidental benefits test, so the plan would not violate this if the premiums are being paid from rollover funds.  Is this correct?  

Forgive my ignorance, I have very little experience with life insurance.  What happens with the 40 years of PS 58 costs that have accumulated to date under the original plan?  Going forward  the premiums will be paid by employee (pre-tax rollover) contributions, would these be includable in income (would he still need a 1099 for PS 58 costs each year?) H

He has sufficient assets (if he rolls over his other funds) to take his annual RMDs from those assets.

What pitfalls do you see with this plan?  How does he get ultimately get these policies out of the plan into his personal ownership?  Can partial swap outs be made?   

Thank you for any input.

[ErnieG]

Regarding the basis, he does have basis as an employee in the current Plan.  He can, with a total account transfer to the Owner Only Plan transfer the basis.  However, the problem will be as an Owner Only he does not create future basis in those policies (unless he opts to operate as a C-Corporation), the economic benefit is taxed and not deductible, therefore no basis is created.  He would have to separately track the prior basis transferred.  He would also need to begin RMDs in 2027 if the Owner Only Plan is established in 2026.  Each year he would need to obtain the FMV of each policy for calculating his RMDs.

 

[Bill Presson]

Rollovers don’t count in the incidental test. That means your premiums have to be less than 50% of nonrollover funds. You don’t get to ignore the test by paying with rollover money. Also look at the document. Many say the insurance must be surrendered at retirement age. 

[FPGuy]

Been a while, but believe there is a 2 year rule and a 5 year relative to using "seasoned" profit sharing money to pay life insurance premiums. The 2 year rule allows 100% of employer contributions (not earnings and not employee deferrals) held in the plan for 2 years or more to be applied to LI premiums; the 5 year rule allows 100% of employer contributions and attributable earnings (but not deferrals and not sure of deferral attributable earnings) to be so applied. Threshold question - following a rollover is money seasoned in the distributing plan considered seasoned in the transferor plan? Query - can an argument be made that until money is considered seasoned in transferor plan (if not by virtue of rollover) you could use the policy's own cash values (at least up to basis) to support the policy irrespective of seasoning? 

 

 

[Bill Presson]

Rollover money never counts in the incidental test. “Seasoned” money is a euphemism for the ability of a plan to allow distributions of profit sharing money held in the plan for two years. You get out of the incidental test because it’s taxed just like any profit sharing money distributed after two years. The insurance companies like to cloak that aspect. 

[ErnieG]

FPGuy you could put the policy on Reduced Paid Up (RPU) however that will not provide relief to the annual "incidental benefit" testing without further contributions to the Plan.  In situations similar to this, the best course of action is to remove the policy from the Plan.

[FPGuy]

Not sure if Bill Presson was implying that seasoned money used to pay LI premiums is a deemed taxable distribution, but my understanding is only that it results in Table 2001 (nee PS 58 Table) imputed income based on the net insurance amount at risk. And not sure where ErnieG is going. RPU, if available (and it isn't for a UL or VUL policy) obviously reduces the death benefit, probably quite substantially, and still results in Table 2001 imputed income based on the reduced net amount at risk; but don't see how additional contributions to the plan result in the potential for incidental benefit testing. But maybe I'm misinterpreting his comment. I do agree that whether continuing to hold the insurance in the transferee plan rather transferring it by distribution or purchase to/by the insured participant is a good idea is inherently questionable.

[401k Conundrums]

Thank you all for your responses, you are beyond helpful.  I see there was a Life Insurance answer book for qualified plans printed several years ago, but it looks to be out of publication now. The EOB has some info, but beyond those are there any other resources to learn about life insurance in plans?

[ErnieG]

Sad but it is dying valuable strategy with few experienced in this area.  The last generation of Pension Actuaries who used slide rules to do calculations has retired and those in the industry with the knowledge are going off of old yellow pad notes.  The EOB is a great source and so are the individuals on this message board.

[FPGuy]

Try "Tax Facts on Insurance and Employee Benefits 2026" published by National Underwriter. Updated annually.