ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Illinois involved a case related to life insurance. The advisor asked: “My client has life insurance in her 401(k) plan. Her accountant told her that the “PS 58 costs” are taxable to her. Can you explain?”
Highlights of Discussion
Your client’s accountant is correct. If the plan uses deductible employer contributions to purchase life insurance for her, then the cost of the protection (the premium paid) is included in her gross income [Treas. Reg. § 1.72-16(b)(2)]. The cost of this coverage is called the “PS 58 cost,” and is includible in income for the taxable year during which the plan pays the premium.
The plan administrator reports the taxable cost of life insurance (the PS 58 cost) annually on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., even when there has been no physical distribution from the plan. Since these amounts have already been taxed, they create a basis in the plan. That means your client will not be taxed again on the cumulative PS 58 costs when the insurance contract is distributed to her or when the life insurance proceeds are distributed to her beneficiaries.
If the plan uses deductible employer contributions to purchase life insurance for a participant, then the cost of the protection (PS 58 cost) is reported on Form 1099-R. The participant must include the amount in taxable income for the year the premium is paid.