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Life Insurance in Retirement Plans
Richard S. Phillips, AIF, ERPA, CPC, QPA, QKA
President and CEO
ERISA Consultants, Inc.
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Provides guidance to determine
the fair market value of
contracts providing life
insurance protection.
Fair Market Value
IRS issued guidance to
shut down abuses of
certain specially designed
life insurance policies.
Abusive Arrangements
The benefit must be definitely
determinable and death benefits can be
funded entirely through life insurance.
Defined Benefit Plan
Premium is a charge to the
account and held as an
investment
Defined Contribution Plan
Rev. Proc.
2005-25
Rev. Rul. 2004-20
DB PlanDC Plan
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Qualification Issues
01Rev. Rul. 2004-21: Availability of
benefits, rights, and features.
AVAILABILITY OF BRF
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Qualification Issues
01
02Must be incidental to providing
retirement benefits
INCIDENTAL DEATH BENEFITS
Rev. Rul. 2004-21: Availability of
benefits, rights, and features.
AVAILABILITY OF BRF
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Qualification Issues
01
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03Exception applies for certain profit
sharing plans.
PROFIT SHARING PLAN
Rev. Rul. 2004-21: Availability of
benefits, rights, and features.
AVAILABILITY OF BRF
Must be incidental to providing
retirement benefits
INCIDENTAL DEATH BENEFITS
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Qualification Issues
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02
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04Employee contributions to purchase life
insurance
EMPLOYEE CONTRIBUTIONS
Rev. Rul. 2004-21: Availability of
benefits, rights, and features.
AVAILABILITY OF BRF
Must be incidental to providing
retirement benefits
INCIDENTAL DEATH BENEFITS
Exception applies for certain profit
sharing plans.
PROFIT SHARING PLAN
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Qualification Issues
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02
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05Life insurance in an ESOP
ESOP
Rev. Rul. 2004-21: Availability of
benefits, rights, and features.
AVAILABILITY OF BRF
Must be incidental to providing
retirement benefits
INCIDENTAL DEATH BENEFITS
Exception applies for certain profit
sharing plans.
PROFIT SHARING PLAN
EMPLOYEE CONTRIBUTIONS
Employee contributions to purchase life
insurance
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Availability of Benefits – Rev. Rul. 2004-21
Benefits
Rights
Features
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Incidental Death Benefits
Incidental to Retirement Pre-Retirement Post-Retirement
The primary purpose of a qualified plan
is to provide retirement benefits. Life
insurance benefits must be incidental.
Life insurance benefits must be
incidental during the pre-retirement
years.
Life insurance benefits during post
retirement must be incidental as well.
Incidental
Death benefits must be incidental to retirement benefits.
Percentage
of Pay
Contribution
Percent-of-contributions rule.
Pension
Plans
Percentage of contributions method, or benefits basis
QPSA
QPSA + additional death benefits must be incidental
QDRO
IRS has not addressed the application of incidental benefits in a QDRO
Post
Retirement
Must be converted to income or distributed
Qualification
The incidental benefit rule is a plan qualification issue. EPCRS
Excess
Benefits
Fully insured plan may satisfy rule even if excess benefits
Deductions
• DB Plans• DC Plans• Self-
Employed
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Profit Sharing Plan Exception
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2 Two-Year Rule
Seasoned Contributions
Profit Sharing Only
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Employee Contributions
Elective deferrals are employer contributions.
Factors
Elective Deferrals
Incidental Benefit
Rollovers
“Seasoned”
Not applicable if purchased with voluntary employee contributions.
Incidental rule does not apply – amounts were distributed from a prior plan.
”Seasoned” rule not applicable to employee contributions.
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ESOP
Incidental
Benefit
The incidental death
benefit rule is
applicable to assets
that are not derived
from an exempt loan.
? • Maybe?
• Maybe not?
NoProceeds from an
exempt loan.
Yes Assets not derived
from an exempt loan
may be used.
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Pros
Pre-tax contributions can be used
to purchase permanent insurance.
A portion of the employer
contribution can be applied to premiums.
Tax-deductible Premiums
May be the only way to afford insurance,
or possibly guaranteed issue policy for qualified plans.
Access to Insurance
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• Plan administration• Fiduciary• Estate planning
Other Cons
Purchasing life insurance
can reduce retirement fund
balances at retirement.
Reduced Funds
A portion of the cost (P.S. 58) is taxed
each year.
P.S. 58 Costs
A tax shelter within a tax
shelter.
Tax Shelter
Cons
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Questions?
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