Life Insurance in Qualified Retirement Plans Flashcards
(17 cards)
What is the primary purpose of a qualified retirement plan that includes life insurance?
To provide retirement income; life insurance may only be included as an incidental benefit
What is the IRS incidental benefit rule for life insurance in qualified plans?
Life insurance must be incidental to retirement benefits, enforced through specific tests and limits
What types of qualified retirement plans can include life insurance?
Most qualified plans except IRAs, SEPs, and SIMPLEs
What must a plan document specify regarding life insurance?
It must expressly permit the purchase of life insurance within the plan.
What is the nondiscrimination requirement for life insurance in qualified plans?
Life insurance benefits must be available to all eligible employees, not just highly compensated or key employees
Life insurance benefits must be available to all eligible employees, not just highly compensated or key employees
The Eligibility Test and the Benefits Test
What is the 25% test for life insurance in defined contribution plans?
Term/universal life premiums ≤ 25% of employer contributions; whole life premiums ≤ 50%
What is “seasoned money” in profit-sharing plans?
Contributions held for at least 2 years (or 5 years for all funds); if only seasoned money is used, percentage limits may not apply.
What is the 100-to-1 ratio test in defined benefit plans?
The death benefit cannot exceed 100 times the monthly accrued retirement benefit
What is the 1/3rd test for defined benefit plans?
Term/universal life premiums ≤ 33% of theoretical contribution; whole life ≤ 66%
What is unique about 412(e)(3) defined benefit plans and life insurance?
These fully insured plans can be funded entirely with insurance/annuity contracts but must still meet incidental benefit rules
How are employer-paid life insurance premiums in a qualified plan taxed?
They are taxable to the employee as an economic benefit each year
How is the death benefit from a plan-owned life insurance policy taxed?
The “pure death benefit” is generally income tax-free to the beneficiary, but cash value may be taxable if distributed improperly
What must happen to the life insurance policy at or before retirement?
It must be surrendered for cash value, converted to an annuity, or distributed to the participant
Can life insurance be included in IRAs?
No, life insurance is prohibited in IRAs, SEPs, and SIMPLEs.
What is a key advantage of buying life insurance inside a qualified plan?
Premiums are paid with pre-tax dollars, reducing the cost compared to after-tax premium payments outside the plan
What is the impact of life insurance on plan contributions in defined contribution plans?
Premiums do not increase the annual contribution limit
