3751. To what extent can a qualified plan provide life or health insurance benefits for its participants?Nuco Employeercline212010-08-27T15:41:00Z2015-07-27T14:32:00Z2015-07-27T14:32:00Z35683238Summit Business Media267379914Site Map/Retirement Plans/Pension And Profit Sharing/Plan Types and Features/Insurance Benefits 25% rule 50% test 100-to-1 incidental limit death benefit health insurance2005-01-25T00:00:00ZTaxFactsDefaultArticle116440425-00-tf1.xml427.00;#2237;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1To what extent can a qualified plan provide life or health insurance benefits for its participants?139900.000000000TaxFactsDefaultArticle2010-01-15T01:16:14ZSBMEDIA\moss-admin3751. To what extent can a qualified plan provide life or health insurance benefits for its participants?According to Treasury regulations, 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.”.Treas. Reg. §1.401-1(b)(1)(i). 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 him or his family incidental life or accident or health insurance.”.Treas. Reg. §1.401-1(b)(1)(ii).The IRS has ruled that a profit sharing plan containing a medical reimbursement account does not satisfy the qualification requirements where distributions 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..See Rev. Rul. 2005-55, 2005-33 IRB 284.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 3735)..See Rev. Rul. 2004-20, 2004-10 IRB 546. The IRS added that transactions 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..See Rev. Rul. 2004-20, 2004-10 IRB 546.Applicability of LimitationA profit sharing plan may provide for distribution of funds accumulated under a plan after a fixed number of years (no fewer than two), the attainment of a stated age, or on the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment..Rev. Rul. 71-295, 1971-2 CB 184. The IRS also has ruled that a plan could permit participants with at least five years of participation to withdraw all employer contributions, including those made during the last two years..Rev. Rul. 68-24, 1968-1 CB 150.If life or health insurance may be purchased only with funds that have been accumulated for the period required by the plan for the deferment of distributions, there is no limit on the amount of such funds that can be used to purchase life or health insurance. The “incidental” limitation applies if the plan permits the use of funds that have not been so accumulated to purchase such insurance..Rev. Rul. 61-164, 1961-2 CB 99; Rev. Rul. 66-143, 1966-1 CB 79. The incidental limitation does not apply to life or health insurance bought with nondeductible voluntary employee contributions..Rev. Rul. 69-408, 1969-2 CB 58. Furthermore, the IRS determined that where the demutualization of a company that had been placed in rehabilitation resulted in traditional whole life contracts being restructured into flexible adjustable life contracts, the restructuring would not result, in and of itself, in a violation of the incidental death benefit requirements..See Let. Rul. 9339024.Aside from the foregoing exceptions, the incidental limitation applies to insurance when it is purchased by a qualified plan on the life of a participant and benefits are payable to or for the participant, the participant’s estate, or the participant’s named beneficiary. The limitation also applies to contracts purchased under a qualified annuity plan..Treas. Reg. §1.403(a)-1(d). It would seem a reasonable inference from this regulation that the incidental rule would not be applied to the purchase of insurance bought by a profit sharing plan on the life of a key individual to indemnify the plan for the premature loss by death of the insured.