Hello,

Client (sole proprietor – attorney) maintains both a (1) Profit Sharing Plan (which owns whole life insurance – so the funding yearly is tied to the premiums) and (2) SEP IRA. Client has 1 full-time employee for the past 5 years as well as a part-time employee. Client has been the sole participant in both plans.

1.Is it possible to maintain Both a SEP IRA and Profit Sharing Plan at the same time – with contributions being made to each provided they are under the DC limits (e.g. $54k in 2017 – NOT counting any catch-up contribution even though the client is in his late 50s since the SEP IRA is 100% funded via employer contributions and the Profit Sharing Plan’s funding is based upon premiums for the policy which is only a few thousand dollars.

2. I have read conflicting information (and reviewed prior information in an Ed Slott post on this) but, with respect to the life insurance policy owned in the Profit Sharing Plan:

a. If death occurs while the policy is still owned in the Plan, and there is a designated beneficiary, I assume as with all life insurance the benefits are income-tax free (as each year part or all of the premium is included in the Client’s income for tax purposes)?

b. If death occurs while the policy is still owned in the Plan, and there is a designated beneficiary, is the policy subject to State and Federal estate taxes?

c. If the client retires and the policy is owned in the Plan, how can the policy be transferred out of the Plan? What are the income tax ramifications if the cash value is > the cost basis? If the Client must ‘pay’ to make the transfer, what are the logistics since he’d be paying the Plan (which he is the sole participant of currently)? What happens to the $$$ in the Plan if paid to transfer the policy out? Would the policy need to be transferred to a partnership or other entity, rather than the insured, to avoid transfer for value rules?

d. Should the policy be appraised/valued prior to the above – taking this as the FMV rather than the insurance company’s valuation (which would presumably approximate the cash surrender value)?

e. Are there any true benefits to life insurance being owned in a qualified plan such as a Profit Sharing Plan versus this being owned outside such as in an ILIT? Doesn’t the qualified plan nature complicate matters unnecessarily so?

3. If the Client never included the one full-time employee and part-time employee in either plan and they should have been participants for the past few years (once qualifying), how does the Client rectify this? Must he provide ‘back contributions’ for the current year and file a Form? Does it make a difference whether or not the employees care about this (I assume not) – versus Client handling this in some manner prospectively, such as freezing both the SEP IRA and Profit Sharing Plan and commencing a new Simple IRA for himself and the 1 FTE and 1 PTE?

Any feedback and/or references would be greatly appreciated. Thank you!

Jason