Who pays insurance premiums for policies in the plan?

[Guest Theresa]

We have a 401(k) plan that has two participants that took hardship distributions, therefore they can not defer for a year. There plan however has individual insurance policies that their match money goes to pay the premiums. If these two participants do not defer and therefore do not get a employer match who is responsible for paying the premiums on the insurance policies in order that they don't lapse?

[Guest PAUL DUGAN]

Under the law the limits on the amount of funds that can be used to pay premiums is cumlative. Up to 50% of the cumlative premiums can be used to pay whole life premiums ( 25% for term). Unless resticted by the plan past 401(k) contributions could be used. If funds are not available to pay premiums I would recomend that the participant be given the option of taking over the policies this can be very important perticularly if the participant has insurability problems. Cash value can be borrowed out prior to sale if cash is a problem. You might also look at after tax voluntary contributions (I hear that there are still plans out there that allow them).

[Guest RJM]

Doesn't the 12-month suspension apply to both employee pre-tax and after-tax contributions?

[Earl]

I think the short answer is the Trust pays the premiums rather than the deposit being split between ins and side fund. The trust debit would be chargable to the individuals with insurance.

Just DON'T let those policies lapse without notifying the participants.

Also, why do you say the match is used? Is this an administrative practice or a document provision? I don't think i have seen a document that specifically limits the source of money available for premium payment. Thus if there is "room" under the incidental limitations if deferrals are used, I don't think you could not use them without participant election to let the policy lapse. Really dangerous situation for the Trustee if he lets a policy lapse when money is available to pay premiums and no participant notice is given. Uninsurability is more common than you think.

[Guest xplan]

The premiums are expenses of the Plan. Either the employer is paying them with a portion of their contributions or they are assessed against the Plan's assets. The Plan document should address the issue of how premium payments are paid. Since I am very familiar with McKay Hochman's prototype document, the payment of the insurance premiums is addressed in section 14.7 of the Basic Plan Document (just in case you use their prototype).

As a side not, death benefit insurance inside of a qualified retirement plan is an incidental benefit that is not a protected benefit under IRC 411(d)(6). Therefore, the employer can allow the policies to lapse, if there is insufficient amounts available to pay the premium. Not to complicate the issue, but the employer can allow the participants to buy the policies from the plan, as long as the document allows for it and no more than reasonable consideration is paid.

[Earl]

as you say...."if there is insufficient amounts available to pay the premium".

I think there is a big problem if the reason for lapsing is "because I couldn't be bothered figuring out how to pay from the Trust rather than the contributions."

By the way, insurance in 401(k) sucks....big time.

[Guest xplan]

I agree, but it is still the option of the employer to pay the premium from Plan assets. Insufficient amounts could be from the fact that the employee is suspended from deferring, and as a result will not receive any matching contributions for 12 months. Although I do not feel that you should offer something and then take it away, simply because someone encountered a financial hardship, it is still an incidental benefit which is not covered under IRC 411(d)(6). If the employer is ernest about offering life insurance benefits, they should do it outside of the Plan to simply avoid situations as such.