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Life Insurance in a Qualified Plan

2 of 28. Life Insurance in a QRP. Defined ContributionDefined BenefitTax-deductible life insuranceDiscounted dollars. 3 of 28. Life Insurance in a QRP. Finding the premium resourceBusiness checkbookThree solutions for price of oneSaving for retirementNeed for life insuranceQRP self-completio

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Life Insurance in a Qualified Plan

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    1. 1 of 28 Life Insurance in a Qualified Plan

    2. 2 of 28 Life Insurance in a QRP Defined Contribution Defined Benefit Tax-deductible life insurance Discounted dollars

    3. 3 of 28 Life Insurance in a QRP Finding the premium resource Business checkbook Three solutions for price of one Saving for retirement Need for life insurance QRP self-completion

    4. 4 of 28 Life Insurance in a QRP Advantages Allows premiums to be paid on tax-deductible basis Provides immediate financial protection for participant’s family in event of pre-retirement death Death proceeds in excess of cash value are received income tax-free to named beneficiary

    5. 5 of 28 Death Proceeds Example $1,000,000 face amount $100,000 CSV $900,000 Income tax free $100,000 Taxable - IRA Rollover

    6. 6 of 28 Life Insurance in a QRP Advantages (cont.) Frees up personal dollars that would have been spent on premiums Buy/sell agreement LTC insurance Survivorship Life

    7. 7 of 28 Life Insurance in a QRP Advantages (cont.) Policy may be distributed in-kind when participant terminates employment Absolute Assignment 1099-R Equivalent CSV to make plan whole Policy Loan “412i Plans & Life Insurance” (QRP-1159)

    8. 8 of 28 Life Insurance in a QRP Advantages (cont.) Seasoned assets in Profit Sharing Plan 2-year 5-year Survivorship Life Single Life

    9. 9 of 28 Life Insurance in a QRP Provides a way to pay for personal life insurance needs with tax-deductible business dollars. Only PS-58 costs are taxable. For example, an owner in the 36% tax bracket can save $5,102 in taxes on a $400,000 policy with an $8,800 premium.

    10. 10 of 28

    11. 11 of 28 Incidental Tests Primary purpose of QRP: provide retirement benefit Only portion of QRP contribution can be funded by life insurance Remainder funded by annuities

    12. 12 of 28 Insurance in a Defined Contribution Plan Adds large pre-retirement income tax-free death benefit Will affect available lump sums since a portion of the fixed contribution is used for premium payments Does not increase or decrease the deductible plan contribution Is limited by the 25%/50% Rule and Profit Sharing 2 & 5-year Rules.

    13. 13 of 28

    14. 14 of 28 Insurance in a Defined Benefit Plan Adds large pre-retirement income tax-free death benefit Does not increase or decrease benefit at retirement Increases the deductible plan contribution Is limited by the 100 times rule, 33 1/3% Rule and 66 2/3% Rule.

    15. 15 of 28 Incidental Test Defined Benefit General Rule Life insurance face amount 100 x projected monthly benefit

    16. 16 of 28 Incidental Test Defined Benefit Alternative Rule Revenue Ruling 74-307 Similar to Defined Contribution 25%/50% tests Based on life insurance premium 66 2/3% of contribution (WL) 33 1/3% of contribution (UL)

    17. 17 of 28 Revenue Ruling 74-307 Example Annual Contribution $100,000 Whole Life Premium $66,600 Universal Life Premium $33,300

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    21. 21 of 28 PS-58 Cost Pension Series Letter #58 Current economic benefit of life insurance coverage Includable as income Face amount – CSV x table/rates IRS Table or insurer’s 1-yr term rates IRS Form 1099-R

    22. 22 of 28 IRS Notice 2002-8 Valuing Economic Benefit After December 31, 2001: IRS Table 2001 Insurer’s OYT Rates “Pending further guidance”

    23. 23 of 28

    24. 24 of 28 PS-58 Cost Cost recovery at distribution Table PS-58 recovered tax-free if policy is distributed to employee Policy surrendered to buy annuity – no recovery Contract annuitized – cost recovery Policy surrendered to pay benefit – no recovery

    25. 25 of 28 PS-58 Cost Self-employed individuals Sole proprietors 10% owners of partnerships Cannot deduct cost of pure insurance Deduction is plan contribution minus PS-58 cost PS-58 not reportable as income No recovery as cost basis Tax impact – wash

    26. 26 of 28 PS-58 Cost Self employed example Plan contribution $10,000 PS-58 Cost $200 Total deductible $9,800 1099-R income $0

    27. 27 of 28 Forms and Procedures Commission Disclosure Statement, QRP-1011 Request for Qualified Policies or Contracts, QRP-1060 Request for Taxpayer Identification Number, IRS Form W-9

    28. 28 of 28 Thank You

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