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2 of 28. Life Insurance in a QRP. Defined ContributionDefined BenefitTax-deductible life insuranceDiscounted dollars. 3 of 28. Life Insurance in a QRP. Finding the premium resourceBusiness checkbookThree solutions for price of oneSaving for retirementNeed for life insuranceQRP self-completio
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1. 1 of 28 Life Insurance in a Qualified Plan
2. 2 of 28 Life Insurance in a QRP Defined Contribution
Defined Benefit
Tax-deductible life insurance
Discounted dollars
3. 3 of 28 Life Insurance in a QRP Finding the premium resource
Business checkbook
Three solutions for price of one
Saving for retirement
Need for life insurance
QRP self-completion
4. 4 of 28 Life Insurance in a QRP Advantages
Allows premiums to be paid on tax-deductible basis
Provides immediate financial protection for participants family in event of pre-retirement death
Death proceeds in excess of cash value are received income tax-free to named beneficiary
5. 5 of 28 Death Proceeds Example
$1,000,000 face amount
$100,000 CSV
$900,000 Income tax free
$100,000 Taxable
- IRA Rollover
6. 6 of 28 Life Insurance in a QRP Advantages (cont.)
Frees up personal dollars that would have been spent on premiums
Buy/sell agreement
LTC insurance
Survivorship Life
7. 7 of 28 Life Insurance in a QRP Advantages (cont.)
Policy may be distributed in-kind when participant terminates employment
Absolute Assignment
1099-R
Equivalent CSV to make plan whole
Policy Loan
412i Plans & Life Insurance (QRP-1159)
8. 8 of 28 Life Insurance in a QRP Advantages (cont.)
Seasoned assets in Profit Sharing Plan
2-year
5-year
Survivorship Life
Single Life
9. 9 of 28 Life Insurance in a QRP Provides a way to pay for personal life insurance needs with tax-deductible business dollars. Only PS-58 costs are taxable.
For example, an owner in the 36% tax bracket can save $5,102 in taxes on a $400,000 policy with an $8,800 premium.
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11. 11 of 28 Incidental Tests Primary purpose of QRP: provide retirement benefit
Only portion of QRP contribution can be funded by life insurance
Remainder funded by annuities
12. 12 of 28 Insurance in a Defined Contribution Plan Adds large pre-retirement income tax-free death benefit
Will affect available lump sums since a portion of the fixed contribution is used for premium payments
Does not increase or decrease the deductible plan contribution
Is limited by the 25%/50% Rule and Profit Sharing 2 & 5-year Rules.
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14. 14 of 28 Insurance in a Defined Benefit Plan Adds large pre-retirement income tax-free death benefit
Does not increase or decrease benefit at retirement
Increases the deductible plan contribution
Is limited by the 100 times rule, 33 1/3% Rule and 66 2/3% Rule.
15. 15 of 28 Incidental Test Defined Benefit General Rule
Life insurance face amount
100 x projected monthly benefit
16. 16 of 28 Incidental Test Defined Benefit Alternative Rule
Revenue Ruling 74-307
Similar to Defined Contribution 25%/50% tests
Based on life insurance premium
66 2/3% of contribution (WL)
33 1/3% of contribution (UL)
17. 17 of 28 Revenue Ruling 74-307 Example
Annual Contribution $100,000
Whole Life Premium $66,600
Universal Life Premium $33,300
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21. 21 of 28 PS-58 Cost Pension Series Letter #58
Current economic benefit of life insurance coverage
Includable as income
Face amount CSV x table/rates
IRS Table or insurers 1-yr term rates
IRS Form 1099-R
22. 22 of 28 IRS Notice 2002-8 Valuing Economic Benefit
After December 31, 2001:
IRS Table 2001
Insurers OYT Rates
Pending further guidance
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24. 24 of 28 PS-58 Cost Cost recovery at distribution
Table PS-58 recovered tax-free if policy is distributed to employee
Policy surrendered to buy annuity no recovery
Contract annuitized cost recovery
Policy surrendered to pay benefit no recovery
25. 25 of 28 PS-58 Cost Self-employed individuals
Sole proprietors
10% owners of partnerships
Cannot deduct cost of pure insurance
Deduction is plan contribution minus PS-58 cost
PS-58 not reportable as income
No recovery as cost basis
Tax impact wash
26. 26 of 28 PS-58 Cost Self employed example
Plan contribution $10,000
PS-58 Cost $200
Total deductible $9,800
1099-R income $0
27. 27 of 28 Forms and Procedures Commission Disclosure Statement, QRP-1011
Request for Qualified Policies or Contracts, QRP-1060
Request for Taxpayer Identification Number, IRS Form W-9
28. 28 of 28 Thank You