Prohibited Transaction Purchase of Life Insurance from Plan

A plan participant wants to purchase life insurance owned by his qualified 401(k) plan. The plan and the participant intend to follow the requirements of PTCE 92-6 and eliminate the PT concerns. However, the participant wants to use IBM stock to purchase the insurance. I could argue that as long as all the requirements of 92-6 are met an in-kind purchase of the insurance should be covered by PTCE 92-6. However, there is also a concern that the use of IBM  stock to purchase the insurance will be deemed a separate prohibited sale or exchange between the plan and the participant party in interest and will not be covered by 92-6. Any thoughts on this? 

I would not advise a client to do this.  From the PTE:

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(e) the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash [emphasis added] position as it would have been had it retained the contract, surrendered it, and made any distribution owing to the participant on his vested interest under the plan;

IBM stock ≠ cash.   When I get questions from clients about in-kind transactions (typically contributions), upon questioning I find that the motivation is a mistaken belief that they can avoid reporting a gain on the asset.  When I tell them even if permitted, it is treated as a taxable sale and the gain will be taxed, they lose interest.

Refer him to legal counsel. 

The exemption’s condition II(e) requires that “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had [the plan] retained the contract [and] surrendered it[.]”  https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf  A delivery of property other than money is not an amount.

Even if a transaction might get an exemption from prohibited-transaction consequences, that does not relieve a fiduciary from any other responsibility.  The plan’s acquisition of IBM shares might be a fiduciary’s breach.

OK Thank-you for your responses. I agree.

Even if he could do it, and it's not treated as a taxable sale, he shouldn't. Say his IBM stock is worth $50,000 with a cost basis of $25,000. By using it buy his policy from the plan, the URG and potential capital gain becomes ordinary income upon future distribution.