Thursday, 21 March 2019

Delicate Interaction: Retirement Plans and Life Insurance

By John Iekel • September 17, 2018 • 0 Comments

Is it appropriate for traditional life insurance to be connected with retirement plans? A feature article that appeared in the Summer 2018 issue of Plan Consultant magazine offers a refresher on split-funded funds and the interaction between retirement plans and life insurance.

“Delicate Interaction: Retirement Plans and Life Insurance” points out that the question is nothing new — it’s been out there for more than two decades. It outlines key regulations and guidance during those intervening 20 years, as well as ASPPA’s stances and responses. For instance, on Feb. 13, 2004, the IRS issued proposed regulations, REG-1269670-03, “Notice of Proposed Rulemaking and Notice of Public Hearing; Value of Life Insurance Contracts When Distributed From a Qualified Retirement Plan.”

These proposed regulations contained proposed amendments:

  • the regulations under Internal Revenue Code Section 402(a) regarding the amount includible in a distributee’s income when life insurance contracts are distributed by a qualified retirement plan and the treatment of property sold by a qualified retirement plan to a plan participant or beneficiary for less than fair market value; and

  • Treasury regulations under Internal Revenue Code Sections 79 and 83 conforming the language in those regulations to the language in the proposed amendments to the Internal Revenue Code Section 402(a) regulations.

These proposed regulations were intended for administrators of, participants in and beneficiaries of qualified employer plans, and to provide guidance to employers that provide group-term life insurance to their employees that is includible in the gross income of the employees and to employers who transfer life insurance contracts to persons in connection with the performance of services.

ASPPA sent a comment letter to the IRS on May 17, 2004 concerning the proposed regulations. Much of the discussion centered around Internal Revenue Code Section 412(i), which is no longer part of the Code; however, the discussion is instructive nonetheless concerning the intricacies of the connection between retirement plans and life insurance, and illustrates the fine detail with which such matters must be treated. ASPPA sent a follow-up letter containing further comments on Jan. 20, 2005.

The other relevant IRS guidance the article showcases is Revenue Procedure 2005-25, which it issued on April 25, 2005. It provides guidance on how to determine the fair market value of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection for purposes of applying the rules Code Sections 79, 83 and 402.

ASPPA sent a letter to the IRS on Rev. Proc. 2005-25 on Aug. 9, 2005. It noted that the revenue procedure set forth the methodology to be used to value non-variable and variable contracts; however, it said, there is concern that the information needed to apply the valuation methodology may not be consistently available. “In particular,” the letter said, “the administrator of a qualified retirement plan will be dependent on the issuer of the contracts to obtain either the value of the contracts or the data necessary to perform the valuation.” It told the IRS that “the Revenue Procedure does not address the situation where the value or data is not provided by the issuer of the product.”

ASPPA recommended that the IRS modify Rev. Proc. 2005-25 to provide sample calculations to be used in the event that the values of contracts (or the data needed to determine the values) held by a qualified retirement plan are not provided directly or in a timely manner by the issuer of such contracts. “Ideally,” the letter said, “the sample calculations should include methodology to be used both with and without the availability of historical data.”

The interaction of retirement plans and life insurance is as delicate as ever, and plans and those who serve them must tread carefully. “My concern is that the fully insured market is still fraught with dangers and practically, this is only one facet of how life insurance might be used in qualified plans,” remarks Larry Raymond, President of Alliance Benefit Group of Michigan, Inc. And what David Witz wrote in a special report The BGS&G Companies issued in summer 1997 remains valid: “Remember,” he says, a fiduciary has an obligation “to ensure that all decisions are made for the ‘Exclusive Benefit’” of the participants. And he suggests considering whether you would “rather defend or prosecute the use of life insurance within a qualified plan before a federal court.”


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