I have a life insurance policy that is in a 401(k) Plan. The policy originated when the plan was a P/S Plan.

The annual premiums for the policy have been paid from his 401(k) deferral balance. The employee has now terminated employment and will not be allowed to defer any longer. His 401(k) balance is less than the annual premium for this year.

The employee does not want to lose this policy. He is 75 years old now and needs the death benefit for his wife. But the cash value of the policy is over $100,000 now and he can not afford to pay ordinary income on the policy if it is distributed to him.

1. Are there any rollover options for the insurance policy?

2. Can he contribute the amount of the premium payment into the plan each year even though he is now terminated?

Any ideas on how to accomplish the above?????

If the participant is 75 years old, I don't believe that the plan should have been paying premiums for this policy anyway. I always understood that premiums MUST cease upon attainment of Normal Retirement Age and the policy surrendered or removed from the Plan...anyone else verify or concur?

That said, the cash value can be stripped from the policy in the form of a policy loan. The proceeds are deposited to the plan and rolled over with the balance of the participants $ to an IRA. Participant then assumes ownership of the policy and would continue to make any premium payments (??) individually. No taxable event because no cash value upon transfer. The policy loan must then be repaid to the policy by the participant personally in order to replenish the value. This may not be the exact method in all cases, but this is how I've seen it done in my plans.

As an aside, (and again due to this participant's age), I think it would be best all the way around if he spoke with a financial advisor to find out the best options for his situation.

I agree that stripping out some or all of the cash value in the form of a loan and then distributing the policy, with a greatly reduced cash value, is probably the only solution. If the participant has been properly paying taxes on the PS-58 costs all along, he will have developed some basis which can be distributed tax-free, so you only have to borrow down to leave that value remaining. He might not want to borrow quite that much anyway, and pay some taxes, so that the payments required to keep the policy in force aren't so onerous.

I'm not aware of any requirement to stop paying premiums and/or distribute the policy at NRA.

I would find out at this point what a reduced paid up value would be. May be as high as the face amount less the loan, and then would not require premiums or interest payments