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EP Abusive Tax Transactions - Deductions for Excess Life Insurance in a Section 412(i) or Other Defined Benefit Plan

In February 2004, the Treasury Department and the IRS issued four items of guidance to shut down abuses involving the use of certain specially designed life insurance policies in retirement plans. Generally, these special policies are made available only to highly compensated employees.

The guidance items address situations where these special policies, often used in conjunction with Section 412(i) plans, are used to artificially increase the deductible contributions to retirement plans while greatly reducing the amount taxable when the policies are distributed to the plan participant.

One of the items of guidance is Revenue Ruling 2004-20 which restricts the improper use of Section 412(i) plans and limits the deductibility of employer contributions used to acquire excess life insurance protection.

The other related items of guidance are:

  • Rev. Proc. 2005-25, 2005-17 I.R.B. 962
    This procedure modifies and supersedes Rev. Proc. 2004-16 for purposes of determining fair market value of a life insurance contract, an endowment contract, etc.
     
  • Revenue Ruling 2004-21 providing that the right to purchase insurance contracts from a retirement plan must be available to all of the participants in the plan in a nondiscriminatory manner.

Press Release
IR-2004-21 - Treasury and IRS Shut Down Abusive Life Insurance Policies in Retirement Plans. (02/13/2004)

Employee Plans News: A Summer 2007 article discussing the requirements for retroactive funding standard account calculations.