3830 / To what extent can a qualified plan provide life or health insurance benefits for its participants?

According to Treasury regulations, life and health insurance benefits must be merely “incidental” to the primary purpose of a plan. A pension plan exists primarily to provide retirement benefits but it “may also provide for the payment of incidental death benefits through insurance or otherwise.”¹ A profit sharing plan is “primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for the participant or family incidental life or accident or health insurance.”²

The IRS has ruled that a profit sharing plan containing a medical reimbursement account does not satisfy the qualification requirements where distributions from the medical reimbursement account are available only for reimbursement of substantiated medical expenses of the participant, spouse, or dependents. The IRS noted that the plan would violate the nonforfeitability requirement of IRC Section 401(a)(7) and may violate other qualification requirements. The fact that only 25 percent of the plan contributions were used to fund the medical reimbursement account did not change this result.³

In 2004 guidance, the IRS specifically described as “excessive” life insurance coverage on a participant that provided for death benefits in excess of the death benefit provided to the participant under the plan ( Q 3813).⁴ The IRS added that transactions that are the same as, or substantially similar, to the example are classified as “listed transactions” if the employer has deducted amounts used to pay premiums on a life insurance contract with a death benefit exceeding the participant’s death benefit under the plan by more than $100,000.⁵

Applicability of Limitation