Employer A and Employer B both sponsor profit sharing plans which permit self-directed investment by plan participants. Employee A, while a participant of Employer A's Plan A, purchased a life insurance policy on his own life, which was held as an asset of Plan A. Vested portions of Employee A's Plan A self-directed account were used to pay the premiums on this whole life policy (all within deductibility limits for PSPs and permitted by Plan A). Employee A terminated employment with Employer, was employed by Employer B and is now a participant in Plan B. Plan B does not permit rollovers of any kind. Plan B does permit the Plan to hold life insurance as a Plan asset (although the Employer discourages this). Employee wants to know whether he may roll the life insurance policy and funds into his Plan B account.
It is clear that the non-life insurance funds held by the Plan may be rolled over into an IRA since Plan B does not permit rollovers. However, the funds attributable to the life insurance policy may not be rolled into the IRA. Employee A is younger than the ERD or NRD for both Plan A and Plan B. The cash surrender value of the life insurance policy is significant (250,000+). The question is, what to do with these funds to avoid a taxable distribution?
My understanding is that, if Employee A pays to Plan A out of his own personal funds (i.e., no Plan A or Plan B funds) the cash surrender value of the life insurance policy prior to rolling the funds into the IRA, there should be no taxable event and Employee A can own the policy outside of the plan. Correct? Any other ways about this?