Life Insurance

I have a 401(k) plan with life insurance policies (ugh!, it was a takeover).  One of the participants with a policy is terminated and is age 64.  Is it correct that the plan sponsor needs to either distribute the policy to him at age 65 or convert the policy to cash?  From what I read, if he were still working for the sponsor and not retired, the policy could stay in force.

Before worrying about what the plan's administration must or may do at a normal retirement age or a required beginning date, consider getting rid of all the plan's life insurance contracts.  The plan would offer each insured a limited opportunity to buy the plan's contract at a fair-market-value price.  For any contract not bought, the plan's trustee would surrender each contract, getting money for its surrender value.

1 hour ago, nancy said:

I have a 401(k) plan with life insurance policies (ugh!, it was a takeover).  One of the participants with a policy is terminated and is age 64.  Is it correct that the plan sponsor needs to either distribute the policy to him at age 65 or convert the policy to cash?  From what I read, if he were still working for the sponsor and not retired, the policy could stay in force.

Yes, that is correct.  More than likely, the plan has language that requires that.  Did you look at the plan language?

I learned, or maybe re-learned something today, thanks.  I guess the issue is insurance coverage after retirement; our FTW language (my emphasis) is:

Conversion of Policies.  If an insured Participant does not die prior to retirement, the Plan Administrator may direct the Trustee to: (1) convert the entire value of any such life insurance contract at or before retirement into cash to provide the retirement benefits set forth in Article 7 so that no portion of such value may be used to continue life insurance protection beyond retirement; or (2) distribute any such contract to the Participant. 

I have already recommended that the policies be surrendered. This is a law firm and you can only imagine every partner’s opinion.  They are currently in the process of moving to our document FTW and it does have this language.  Thanks for the input. 

Depending on the type of policy the insured may have recoverable basis to the extent of insurance related imputed income. Less clear is whether basis only recoverable against an actual distribution of the policy and forfeit if policy is surrendered by the plan and cash value used for a lump sum distribution.

1 hour ago, FPGuy said:

Depending on the type of policy the insured may have recoverable basis to the extent of insurance related imputed income. Less clear is whether basis only recoverable against an actual distribution of the policy and forfeit if policy is surrendered by the plan and cash value used for a lump sum distribution.

Long ago settled that you could recover your basis from the distribution of cash when the contract was surrendered by the plan and you got the cash instead of the contract.  It was unclear for a number of years but ultimately resolved that way. And no, don't ask me for a cite at this time.

52 minutes ago, Larry Starr said:

Long ago settled that you could recover your basis from the distribution of cash when the contract was surrendered by the plan and you got the cash instead of the contract.  It was unclear for a number of years but ultimately resolved that way. And no, don't ask me for a cite at this time.

PLR 8721083.  No I didn't know off the top of my head but found it...referenced in ASPPA/IRS Q&As from 1999, with guess-who as a presenter.

Let's see...Ned Ryerson??

14 hours ago, Bird said:

PLR 8721083.  No I didn't know off the top of my head but found it...referenced in ASPPA/IRS Q&As from 1999, with guess-who as a presenter.

My wingman! Thanks for the work. I'm getting old so I don't remember who was the presenter! ?