The ERISA consultants at the Retirement Learning Center Resource 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 plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Wisconsin is representative of a common inquiry related to life insurance in qualified retirement plans. The advisor asked:
“My client has life insurance inside his profit sharing plan at work. He will be retiring soon. Can he leave the policy in the plan after retirement?”
Highlights of the Discussion
No, the IRS says a life insurance policy cannot remain in a plan past the plan participant’s retirement (Revenue Rulings 54-51 and 74-307). The reasoning for this relates to the IRS’s rules that holding life insurance in a qualified retirement plan is okay as long as the death benefits are “incidental,” meaning they must be secondary to other plan benefits. Death benefits are considered incidental if the plan meets two conditions: (1) employer contributions used to purchase coverage are limited as prescribed; and (2) the plan requires the trustee to convert the entire value of a life insurance contract at or before retirement into cash, provide periodic income so that no portion of the policy may be used to continue life insurance protection beyond retirement, or distribute the contract to the participant (IRS Publication 6392, Explanation #4, Miscellaneous Provisions).
Regarding the contribution limits, life insurance coverage in a defined contribution plan is considered incidental if the amount of employer contributions and forfeitures used to purchase whole or term life insurance benefits are limited to 50% for whole life or 25% for term policies. No percentage limit applies if the participant purchases life insurance with company contributions held in a profit sharing plan for two years or longer.
The incidental benefit rules that apply to holding life insurance in a qualified retirement plan prevent the plan from retaining the policy past a participant’s retirement.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2019, Retirement Learning Center, LLC. Used with permission.