participant terminates employment - plan has a life insurance policy

Pardon my igmorance, I have not had this issue come up in quite awhile.

One of our clients maintains a profit sharing plan, one individual has a life insurance policy owned by the plan and he has terminated employment.

As far as I can remember, the choices are either to surrender the policy for its cash value and the deposit the cash value into the participants' individual account - just a change in investments  OR

participant buys the policy for the cash value from personal funds

Questions - when he purchases the policy, where does that money go?  Part of the general assets of the plan, or into the individual participant's account?

If the money stays in the plan, is it allocable to the remaining participants?

52 minutes ago, thepensionmaven said:

If the money stays in the plan, is it allocable to the remaining participants?

Presumably this was something elected by the participant, and paid for from the participant's money, so...no.

Is this an individually directed Plan or Pooled?

Assuming it's an individually directed plan and the life insurance policy is part of his account, then if he purchaces the policy from the Plan, the funds would go to his individual account just like if the policy was surrendered for Cash Value.

Bird and Lou are correct. Make sure you use the the actual fair market value for the purchase and not just the cash value. The insurance company can provide that.

"and paid for from the participant's money" - the insurance premium is paid by the company as part of the total contribution for the guy.

Individual accounts, and not discussed yet, client just inquiring on the options and ramifications.

1 hour ago, Bill Presson said:

Bird and Lou are correct. Make sure you use the the actual fair market value for the purchase and not just the cash value. The insurance company can provide that.

They CAN, but in all likelihood, they WON'T.   They will tell you it is CSV, over and over again.  Even if you send them RP 2005-25.   If only TPAs could bill the true value of their time spent messing around with this stuff... 

17 hours ago, thepensionmaven said:

"and paid for from the participant's money" - the insurance premium is paid by the company as part of the total contribution for the guy.

My emphasis.  That means it is in fact paid for from the participant's money.

Somewhat related question - plan owner and only remaining participant in terminated plan wants to cash out his life insurance policy. Can the funds from the cash out be deposited directly into an IRA, or must it be cashed into the plan, then distributed?

Never dealt with a distribution of a life insurance policy in any format before.

cashed into the plan, then distributed

Actually I don't think it is so much about the reporting requirements because it could be considered a rollover from a plan to an IRA.  But I doubt the insurance company would agree to do that.  And...some of that money is tax-free so you just don't want to do that.

okay, so a very naive question - Who calculates the tax free amount? I don't know who has records of this long ago purchase.

On 11/26/2021 at 2:27 PM, TPApril said:

okay, so a very naive question - Who calculates the tax free amount? I don't know who has records of this long ago purchase.

We always kept track of the cumulative PS-58 costs if we prepared the 1099-Rs.

Some insurance companies, who actually know what they are doing when it comes to issuing insurance policies in qualified plans, can easily provide this information. Some other insurance companies are absolutely useless in this regard. Hopefully you get one of the good ones...