insurance paid by deferrals... PS-58 needed?

Taking over a plan where some participants have insurance policies (the broker "forgot" to mention that, grrrrr).  I asked about PS 58 costs and the sponsor told me they were not necessary because the employee pre-tax deferrals were covering the premiums (being sent directly to the insurance company instead of to the recordkeeper).  I've never heard of that, but I know very little about insurance other than I don't want to deal with it.  Anyone want to confirm or debunk this?  Thanks.

That life insurance is paid for from participant contributions rather than from a matching or nonelective contribution does not by itself nonapply the tax law about a “PS 58 cost” attributed for the life insurance death benefit.

Internal Revenue Code of 1986 (26 U.S.C.) § 72(m)(3):

Life insurance contracts

(A)  This paragraph shall apply to any life insurance contract—

(i) purchased as a part of a plan described in section 403(a), or

(ii) purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant.

(B) Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secretary to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied.

(C) In the case of the death of an individual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract immediately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash surrender value shall not be includible in gross income under this section and shall be treated as provided in section 101.

http://uscode.house.gov/view.xhtml?req=(title:26%20section:72%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true

26 C.F.R. § 1.72-16(b) https://www.ecfr.gov/current/title-26/part-1/section-1.72-16#p-1.72-16(b).

26 C.F.R. § 1.402(a)-1(a)(3) https://www.ecfr.gov/current/title-26/part-1/section-1.402(a)-1#p-1.402(a)-1(a)(3).

That someone mentioned premium payments sent directly to the insurance company instead of to the recordkeeper suggests possibilities for violations beyond the one you ask about.

Consider reevaluating whether, or on what fee, and with what scope of engagement, you want the prospective client.

This is not advice to anyone.

Peter is on point.  Usually, the insurance carrier prepares the PS 58 reports and forwards them to the employer.  The employer then prepares the 1099-Rs.  However, if the PS58 is not reported, taxes paid, the entire death benefit is taxable to the survivor.  There is also no basis recovery.

On 8/14/2025 at 2:46 PM, Peter Gulia said:

That someone mentioned premium payments sent directly to the insurance company instead of to the recordkeeper suggests possibilities for violations beyond the one you ask about.

@Peter Gulia, do you mind elaborating on this?  In the few plans with insurance that I've seen (where it's employer money paying the premiums), the employer sends the money for the premium directly to the insurance agency and the difference to the rk of the rest of the assets.  What's the difference here?

I meant only that a recordkeeper might not have performed its services on amounts that didn’t pass through the recordkeeper’s processing. If so, the recordkeeper might not have cross-checked what was or wasn’t done by another service provider.

And reading into your description of the situation, I imagined that the plan’s sponsor/administrator might not have skillfully or completely controlled the services the plan needs.

If the sponsor/administrator had a mistaken assumption about tax-reporting life insurance, what else might they have missed?

Who tested whether the life insurance met the incidental limits?

Did anyone test whether prohibited-transaction exemptions were met?

Might a predecessor service provider have been less capable than AlbanyConsultant?

If a third-party administrator or the plan’s administrator provides the services needed but not done by the recordkeeper, that might meet the plan’s needs.

OK - all the usual pitfalls with insurance.  Got it.  Thanks.

Well, the plan came from a low-cost, "do it yourself" kind of platform, so I'm sure that everything was properly reviewed and tested.  *eyeroll*