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Advanced
Designs Reporter
August
26, 2005
Fields of
Relevancy: Qualified Plans, Employee
Benefits, Life Insurance Valuation
Summary: The IRS
has issued final regulations on the valuation of life
insurance when distributed from a qualified plan. The
final regulations generally retain the same rules set
forth earlier this year in Revenue Ruling
2005-25.
Analysis: Today the
IRS issued final regulations regarding the value of a
life insurance policy when it is transferred from a
qualified plan to a participant (under IRC § 402), or
employer to an employee (under IRC § 83), or for
taxation of permanent benefits under a group-term life
insurance plan (under IRC § 79). These regulations do
not materially differ from the proposed regulations issued on February
13, 2004. The value of a policy in the
above three situation is its “fair market value.” The
final regulations do not define the term “fair market
value” but the pre-amble to the regulations state that
taxpayers may continue to use the safe harbor definition
provided in Revenue Ruling
2005-25.
The only notable change
contained in the final regulations is the treatment of
the purchase of a policy from a qualified plan when the
purchase is less than the policy's fair market value.
Under the proposed regulations, if the purchase is less
than fair market value, the difference between the
purchase price and fair market value is taxable to the
participant, and it is treated as a distribution from
the qualified plan. This qualified plan distribution is
subject to all the limitations of the Code, including
the restrictions on in-service distributions from
certain types of qualified plans, such as defined
benefit plans (e.g. 412(i) plans) and the 10% penalty
for early withdrawals. The final regulations draw a
distinction between transfers before August 29, 2005 and
those on or after that date. For transfers before August
29, 2005 the difference between the purchase price and
the fair market value is still taxable to the
participant, but it is not considered a qualified plan
distribution. For transfers on or after August 29, 2005,
the difference between the purchase price and the
policy’s fair market value is both taxable to the
participant and treated as a distribution from a
qualified plan.
Reference: For more information, please click here to
view the Final 412(i) Regulations.
Neither
Pacific Life nor Pacific Life & Annuity are engaged
in the practice of law, nor are they licensed to do so.
Communications with Pacific Life and Pacific Life &
Annuity employees are not intended as legal advice, nor
may they be construed nor relied upon as such. Pacific
Life Insurance Company's and Pacific Life & Annuity
Company's life insurance and annuity products can only
be solicited in those states where the product has been
approved. Product features and availability vary by
state.
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