Maintaining Life Insurance Policies for Terminated Participants

What are the conditions that trigger the requirement to surrender or distribute an individual life insurance policy held on behalf of a participant from a qualified plan after a participant terminates?

How does terminating before or after NRA impact whether a life insurance policy held in a participant’s account needs to be surrendered or distributed?

Our ASC BPD Section 10.08(d) says, “Life insurance policies under the Plan, which are held on behalf of a Participant, must be distributed to the Participant or converted to cash upon the later of the Participant’s Annuity Starting Date (as defined in Section 1.12) or termination of employment.”

And then Section 1.12 says in part, “Annuity Starting Date. The date an Employee commences distribution from the Plan.”  Do partial lumps, installments or RMDs trigger this requirement?

I’m also looking at the ERISA Outline Book which says, “Life insurance can't continue beyond retirement. Rev. Rul. 54-51 includes a requirement that for life insurance to be incidental, the policy must be converted to retirement income or distributed to the participant no later than the normal retirement date under the plan. Rev. Rul. 57-213 clarifies that the life insurance policy may be continued beyond retirement age, if the participant does not elect to retire. The IRS’ Listing of Required Modifications published for prototype plans provides that conversion or distribution of the policy is not required until the “annuity starting date” (i.e., the date distributions commence). Although not addressed by the IRS, it should be reasonable to allow insurance coverage to continue beyond the required beginning date under IRC §401(a)(9), if the participant has not terminated employment.”

Any guidance on this would be appreciated.

If they are working, the insurance can stay in place past retirement age. If they terminate, then it has to be surrendered or distributed at retirement age. If they've been gone for awhile by that time, you need to make sure the premiums are still within the incidental limits or the premiums become taxable distributions at that point.