We are a TPA with a prototype plan. Our document does not allow for life insurance as a plan investment. We have a new client that is getting ready to move their recordkeeping business to us. Their plan currently has some participants with life insurance in the plan. If the participants are under 59 1/2 and not eligible for a distribution from the plan, how do they remove the life insurance from the plan? Can the participants still purchase the contracts by paying the cash surrender value into the plan in exchange for having the policies transferred? With this go in as after tax? What other options do they have? Thanks for any assistance!

I believe there is a prohibited transaction exemption for this from the Department of Labor (recently changed ? to deal with "springing cash value" insurance) that allows the purchase at the fair market value (used to be cash surrender value, but as noted I think this has been changed). Be sure to check the class exemption.