Qualified Plans

Summary:

AALU 2007-2008 Qualified Plans Committee

Qualified Plans

aalu webmaster 03 Jan 2008 16:42

Please add comments and concerns below.

Re: Qualified Plans

nqdccal 11 Jan 2008 18:47

Question. A 401(k) plan is being terminated and all assets for each plan participant will be rolled over to an IRA. One participant has several life insurance policies in the 401(k) with significant cash values. Could the participant transfer the policies to the IRA if there is no need to pay any further premiums or is does the prohibition on life insurance in an IRA apply regardless of any furher premium payments. If the policy can't be transferred would you suggest cashing in the policies before the roll over so the cash is part of the roll over and avoids any tax liability? Any other thoughts would be appreciated.

Re: Qualified Plans

Erik Ruselowski 22 Jan 2008 22:48

nqdccal:

This is Erik in AALU's policy shop. I forwarded your question to our Qualified Plans Committee to see what some of their responses would be. I've pasted the comments below.

"First, life insurance cannot be held inside an IRA, so there would be a prohibitive transaction if the insurance were to be transferred there, regardless of the premium paying status. Secondly, the cash value can be rolled over, but a better strategy is to borrow or withdraw the cash value in the policy down to the cumulative PS/Table I charges that have been recognized annually over the life of the contract ( as income by the participant) and then distribute the policy with the only cash in the contract being an amount equal to these cumulative charges. This amount represents cost basis in the contract for the participant and would be distributed income tax free.

This approach would be advisable assuming the participant wants to maximize the amount that he/she rolls into the IRA. Other approaches are available should this not be the objective. This approach does not mandate the surrender of the policy; but the policy will have a loan against it when distributed."

And secondly:

"#1: I do not feel that there is any way that Life Insurance can be owned in an IRA unless acquired in 1974 thru about 1976 (when it was permitted).

#2: We don't know the age of the participant but if he is retiring he can "recapture" cost basis (the sum of all PS-58's) if he rolls the policy out. This "recapture" is forfeited if they cash the policy in before the transfer. This can be a significant number for a person with several policies….and it is 100% income tax free recovery.

#3: OR, can the participant justify his or her own business. For example could they form an LLC (one person LLC) that buys and sells on e-bay. Or anything else that might qualify as a business. Then the "new business" can adopt a "qualified plan" instead of an IRA and transfer all of the assets, including the life insurance, to the new Plan. If the business never makes it or fails they can maintain the PLAN as long as they wish."