Dear Mr. Goldberg:
This is in response to your request for an advisory
opinion concerning the applicability of Prohibited Transaction Exemption (PTE)
92-6, as amended,(1) to a transfer
from an employee benefit plan of a second to die life insurance contract
to the husband and wife whose lives are insured under the policy and who
are both participants in the plan.
You presented the following facts in your submission.
The plan involved is a tax-qualified profit sharing plan (the Plan). A
participant is permitted, under the terms of the Plan, to direct the
investment of his or her individual account into a life insurance policy
on his or her life, or on the life of someone in whom the participant has
an insurable interest. The policy at issue was purchased solely with funds
from the husband’s rollover account. In response to our questions, you
confirmed that the Plan provides that participants have discretion with
respect to investments in their rollover accounts.
The couple does not wish the Plan to retain the
ownership of the second to die life insurance policy on their lives, nor
do they wish the Plan to surrender it. They would like to jointly purchase
this policy from the Plan for its cash surrender value (determined at the
time of the sale) provided that such a transaction is not a prohibited
transaction.
You have asked the following two questions relating to
PTE 92-6:
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Whether a second to die life
insurance contract covering a husband and wife, would be deemed, for
purposes of PTE 92-6, to be an individual life insurance policy?
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Whether the sale by the Plan of the
second to die life insurance policy jointly to a husband and wife who
are both plan participants, for its cash surrender value would be
deemed, for purposes of PTE 92-6, to “put the plan in the same cash
position as it would have been had it retained the contract,
surrendered it, and made any distribution owing to the participant on
his vested interest under the plan?”
PTE 92-6 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 of an individual life insurance or annuity contract by an
employee benefit plan to a participant provided that:
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Such participant is the insured
under the contract;
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the contract would, but for the
sale, be surrendered by the plan;
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the amount received by the plan as
consideration for the sale is at least equal to the amount necessary
to put the plan in the same cash position as it would have been had it
retained the contract, surrendered it, and made any distribution owing
to the participant on his vested interest under the plan;
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In AO 98-07A (September 24, 1998),
the Department opined that “to the extent that state law would
permit an individual life insurance contract to cover the life of the
participant and the participant's spouse, the Department would deem
such a contract to be an individual life insurance contract for
purposes of PTE 92-6.”(2)
The same analysis would apply here. Here the policy covers two
participants, who are husband and wife.
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The husband and wife seek to jointly
purchase the second to die policy, under which they are both insured.
This joint purchase meets the requirements of the class exemption
because they both qualify as participants insured under the contract.
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The class exemption requires that
"the contract would, but for the sale, be surrendered by the
plan." In the preamble to the 2002 amendments to PTE 92-6,(3)
the Department confirmed that “if the participant has discretion and
control of his/her account in the plan, and has exercised that
authority, without being subject to undue influence, in accordance
with plan provisions for individually directed investment of
participant accounts, to sell a life insurance contract in compliance
with the conditions of PTE 92-6, the requirement of condition I (3)(4)
would be satisfied." You represent that the husband has
investment discretion with respect to the rollover account used to
fund the policy and he desires to exercise that discretion to sell
this policy to himself and his spouse in compliance with the
conditions of PTE 92-6.
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PTE 92-6 requires that “the amount
received by the plan as consideration for the sale is at least equal
to the amount necessary to put the plan in the same cash position as
it would have been had it retained the contract, surrendered it and
made any distribution owing to the participant of his vested interest
under the plan.” You represent that the amount the husband and wife
will pay is the cash surrender value. Assuming this amount is as much
as the Plan could obtain if the policy was surrendered to the
insurance company, the transaction will meet this condition of the
class exemption.
As you are aware, the Internal Revenue Service recently
amended its regulations pursuant to sec. 79, 83 and 402(a) of the Code to
address distributions of life insurance and related products from
qualified plans. These regulations provide that if a qualified plan
transfers property to a plan participant or beneficiary in exchange for
consideration that is less than the fair market value of the property, the
transfer will be treated as a distribution by the plan to the participant
to the extent the fair market value of the distributed property exceeds
the amount received in exchange.(5)
As amended, if the fair market value of a life insurance policy is
more than its cash surrender value, not only will this bargain element be
subject to income tax in the year the policy is distributed but, as the
Service explained in the preamble:(6)
any such bargain element is treated as a distribution
under the plan for all other purposes of the Code, including the
qualification requirements of section 401(a). Thus, for example, this
bargain element is treated as a distribution for purposes of applying
limitations on in-service distributions from certain qualified
retirement plans and the limitations of section 415.
This amendment to the IRS regulations provides for
different tax consequences than those described in the preamble to PTE
77-8,(7) the
predecessor of PTE 92-6. In this regard, it is the view of the Department
that this amendment to the IRS regulations does not affect the relief
described in PTE 92-6, or any of the conditions contained therein.
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.
Sincerely,
Ivan L. Strasfeld
Director, Office of Exemption Determinations
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In 2002, the Department amended PTE
92-6, 67 FR 56313, (9/3/02) to expand the coverage of the exemption to
include the sale by an employee benefit plan of an individual life
insurance or annuity contract to certain personal or private trusts.
PTE 92-6 amended PTE 77-8 to provide that the relief for transactions
described in part I of the exemption, would be available, effective
October 22, 1986, for plan participants who are owner-employees or
shareholder-employees.
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In response to a comment letter
received in connection with the 2002 amendment to PTE 92-6, the
Department confirmed that PTE 92-6 would apply to a policy on the life
of the participant and the participant's spouse. 67 FR 56313, 56314
(9/3/2002).
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67 FR at 56314.
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Sec. I(3) provided that “the
contract would, but for the sale, be surrendered by the plan.” The
new citation to this condition is sec. II(c).
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IRC Reg. sec. 1.402(a)-1(a)(1)(iii),
TD 9223, 70 FR 50967 (8/29/05).
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70 FR at 50970.
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In the preamble to PTE 77-8, the
Service stated that where the fair market value of an insurance policy
exceeded its cash surrender value, this amount would not be deemed a
distribution of benefits from the plan to such participant for
purposes of subchapter D of Chapter 1 of the Internal Revenue Code of
1954, the applicable tax provision at the time.
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