A new federal advisory opinion could help husbands and wives who hold life insurance policies inside employee benefit plans.
The opinion, Employee Benefits Security Administration Advisory Opinion 2006-03A, covers the case of a husband and wife who have been keeping a second-to-die life insurance policy inside a profit-sharing plan.
The husband and wife, who are both insured by the policy and are both participants in the plan, want to join together to buy the policy from the plan, for the cash surrender value, without having to pay any extra taxes as a result of that transaction, according to Seymour Goldberg, the Melville, N.Y., lawyer who is representing them.
Ivan Strasfeld, director of EBSA’s Office of Exemption Determinations, writes in the new advisory opinion that he believes the couple can buy the policy without having to pay extra federal taxes as a result.
The plan involved in the case lets participants invest assets in life insurance policies, and the husband used rollover funds to buy the second-to-die policies, Strasfeld writes.
An earlier ruling, Prohibited Transaction Exemption 92-6, lets plan members get out of paying certain taxes if they buy an individual life insurance policy from a plan to keep the policy from lapsing and pay an amount such that the amount will “put the plan in the same cash position as it would have been had it retained the contract, surrendered it, and made any distribution owing to the participant on his vested interest under the plan.”
For the purposes of PTE 92-6, a second-to-die life insurance policy is an individual life insurance contract, Strasfeld writes, citing a September 1998 opinion.
In addition, if the cash surrender value is as much as the plan could obtain if it surrendered the policy to the insurance company, the cash surrender value is a high enough price to meet the PTE 92-6 conditions, Strasfeld writes.
Strasfeld adds that recent regulatory changes concerning conflicts between the fair market value of plan life insurance policies and the cash surrender value have no effect on plan members’ ability to get relief under PTE 92-6.
A copy of the letter ruling is on the Web at Document Link