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Seymour Goldberg, Esq.
Goldberg & Goldberg, PC
One Huntington Quadrangle, Suite 3S09
Melville, New York 11747
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2002-12A
PTE 92-5 (57 FR 5019, 02/11/1992)
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Dear Mr. Goldberg:
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This is in response to your request for an advisory opinion concerning the
applicability of Prohibited Transaction Exemption (PTE) 92-5, (57 FR 5019,
February 11, 1992), to a transfer of a life insurance contract by a
participant to his or her employee benefit plan.
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You have presented the following facts in your submission. Your office
maintains a tax-qualified profit sharing plan (the Plan). There are five
participants in the Plan, two of which are officers and shareholders. The
Plan’s adoption agreement provides that if rollover accounts are permitted
and the participant is permitted to invest any part or all of the rollover
account in life insurance, then the participant may direct the purchase of
life insurance on the participant’s life.
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One of the Plan’s participants owns an individual whole life insurance
contract in his name that is a new policy and will not have any cash
surrender value for three years. The life insurance contract is not subject
to any lien of any type. Another participant in the Plan owns a term life
insurance contract which by its nature has no cash surrender value.
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You have asked the following two questions relating to PTE 92-5:
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Whether, under the circumstances described above, the transfer of the
individual whole life insurance contract, which at the time has no cash
surrender value, by the participant to his or her rollover account without
the payment of consideration by the Plan satisfies the conditions of PTE
92-5?
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Whether, under the circumstances described above, the transfer of the
individual term life insurance contract, which has no cash surrender value,
by the participant to his roll-over account in the Plan, for no
consideration, satisfies the conditions in PTE 92-5?
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PTE 92-5 provides, in relevant part, that the restrictions of sections
406(a) and 406(b)(1) and (2) of the Employee Retirement Income Security Act
of 1974 (ERISA) and the taxes imposed by section 4975(a) and (b) of the
Internal Revenue Code of 1986 (the Code) by reason of section 4975(c)(1)(A)
through (E) of the Code, shall not apply to the sale, transfer or exchange
of an individual life insurance or annuity contract to an employee benefit
plan from a plan participant on whose life the contract was issued, or from
an employer, any of whose employees are covered by the plan, if -
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The plan pays, transfers or otherwise
exchanges no more than the lesser of --
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The cash surrender value of the
contract;
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If the plan is a defined benefit
plan, the value of the participant’s accrued benefit at the time
of the transaction (determined under any reasonable method); or
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If the plan is a defined
contribution plan, the value of the participant’s account balance;
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Such sale, transfer or exchange does
not involve any contract which is subject to a mortgage or similar lien
which the plan assumes;
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Such sale, transfer or exchange does
not contravene any provision of the plan or trust document.
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You represent that the individual whole life insurance contract is new and
will not have any cash surrender value for three years. With respect to a
sale, transfer, or exchange of an individual life insurance contract by a
participant to a defined contribution plan, paragraphs I.1(a) and (c) of PTE
92-5 provide a limitation on the amount the Plan can pay for the contract.
In such case, that limitation is the lesser of the cash surrender value of
the contract or the value of the participant’s account balance in the
defined contribution plan.
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It is the view of the Department of Labor (the Department) that where the
cash surrender value of the contract is zero, the conditions in paragraphs
I.1(a) and (c) are met when there is a transfer of the contract by the
participant to his or her rollover account for no consideration. We note
that because the life insurance contract will have no cash surrender value
at the time of the transaction, compliance with the condition in paragraph
I.1 of PTE 92-5 requires that the Plan does not pay any consideration.
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Similarly, the transfer of the individual term life
insurance contract by the participant to his or her roll-over account in
the Plan, for no consideration, would meet the conditions in paragraphs
I.1(a) and (c) of PTE 92-5. Thus, as in our response to your first
question above, the Plan may acquire the term-life individual life
insurance contract from the participant in accordance with the terms of
PTE 92-5, but the Plan may not pay any consideration for the term-life
contract.(1)
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This letter constitutes an advisory opinion under ERISA Procedure 76-1 and
is issued subject to the provisions of that procedure, including section 10,
relating to the effects of an advisory opinion. We note that pursuant to
section 5 of ERISA Procedure 76-1 this advisory opinion relates solely to
the proposed transactions described in your letter.
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Sincerely,
Ivan L. Strasfeld
Director, Office of Exemption Determinations
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In this regard, it should be noted
that the Department stated in PTE 77-7 (42 FR 31575, June 21, 1977)
that “...for Federal income tax purposes, the value of an insurance
policy is not the same as, and may exceed, its cash surrender value.
See Rev. Rul. 59-195, 1959-1 C.B. 18. The Federal income tax
consequences of such a transfer must be determined in accordance with
generally applicable Federal income tax rules.”
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