3834 / To what extent can a defined benefit pension plan provide life or health insurance benefits for its participants?

Death benefits under a pension plan of any type will be considered incidental if either (1) less than 50 percent of the employer contribution credited to each participant’s account is used to purchase ordinary life insurance even if the total death benefit consists of both the face amount of the insurance and the amount credited to the participant’s account at time of death, or (2) such death benefits would be incidental under the “100-to-1” test described in Q 3831.¹

It is clear, therefore, not only from the foregoing but also from dicta in prior rulings that the 25 percent rule ( Q 3831) is intended to apply to life insurance benefits provided in defined benefit pension plans as well as in defined contribution plans. Because in a pension plan “death benefits” must be incidental, it would seem that the 25 percent rule would be applied to the cost of providing the entire death benefit the plan actually pays.

In the case where a plan purchases life insurance on participants’ lives and participants have separate accounts, it appears that the 25 percent rule is applied only to the cost of providing current life insurance protection (i.e., the portion of premium paying for the “amount at risk”).²