Life Insurance inside a terminated profit sharing plan
If a participant purchases life insurance inside of a profit sharing plan and the plan is terminated can the participant withdraw the life insurance policy? If so can they avoid the taxes by rolling over the amount of the cash value with other assets? For example, cash value is $100,000 and participant wants to keep the insurance so they change ownership. I believe the cash value less PS 58 cost would be taxable. Can the participant use other assets ($100,000 less the insurance cost) and set up an IRA roll over? Will this avoid the taxes?
Permalink Submitted by mk foss on Mon, 2009-06-01 00:51
Normally when a plan participant receives property as a distribution from a qualified plan, he/she avoids taxation by either rolling over the property or selling the property and rolling over the proceeds. Rev. Rul. 87-77 says that the participant cannot retain the property and roll over cash equal to the property’s fair market value.
This is an interesting question because an IRA cannot invest in a life insurance policy so rollover would be impossible. A plan loan cannot be rolled over because borrowing is prohibited but in PLR 200617037, a plan participant was able to avoid tax on the amount of a plan loan offset against a lump sum distribution by contributing an equal amount of cash to an IRA within 60 days. Before that PLR I would have thought that the participant would have had to pay tax on the loan amount. If the amount is significant, a PLR might allow a rollover of an equal amount of cash based on the specific circumstances.
Federal withholding would be required on the cash value of a policy distributed. The participant could contribute the amount of the tax or else the plan adminstrator would need to use other assets to meet the withholding requirement. That could mean that the participant is taxed on the value of the policy plus an additional 20% or so used to pay the tax.
Permalink Submitted by Bruce Steiner on Mon, 2009-06-01 01:14
The participant can in effect accomplish this by purchasing the policy from the plan.
Permalink Submitted by fairira on Mon, 2009-06-01 15:47
Is there any IRS problem with a plan participant doing transactions with his retirement plan?
Permalink Submitted by Al Fry on Wed, 2009-06-03 01:28
There is an exemption for purchasing one’s LI from his plan.