Life Insurance in a Qualified Plan

Question 0

Life Insurance in Qualified Plans Taxation

Answer 0

1. Participant must include in Fed Gross Income the cost of “Pure Insurance” protection cost of life insurance provided in qualified plan.
   a. Pure Protection determined by cost of insurance by one year term rate called Table 2001 cost. If actual cost is lower, it may be used.
2. $$ included in EE’s income treated as basis for purposes of distributions

Question 1

Life Insurance in a Qualified Plan

Answer 1

1. Life Insurance thru Qualified Plan or 403b
   a. Not ER deductible cost of life insurance in Qualified Plan
   b. No life insurance in IRA. ALL IRA’S: Simple, Trad, Sep, Sarsep
2. Must Pass at Least 1 Test
   a. The Percentage Test - No more than 50% of ER contributions can purchased whole life insurance; No more than 25% ER contributions for term or universal.
   b. 100:1 Ratio Test, (Defined Benefit Plans) - Death Benefit cannot exceed 100 times expected monthly benefit for EE. (Expected monthly benefit $2000, no more than $200,000).

Question 2

Life Insurance in Qualified Plan Tax Issues at Death

Answer 2

1. Value at Death included in Gross Estate of decedent EE and may be subject to income tax
2. $$ paid to beneficiary from a life insurance policy funded within a qualified plan may be subject to income tax
   a. taxable portion equals the cash surrender value of policy
   b. beneficiary may offset the cash surrender portion by the sum of the costs included in income by the decedent during the decedent’s life.