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Employee Benefits Security Administration

Advisory Opinion

December 4, 2002

Seymour Goldberg, Esq.
Goldberg & Goldberg, PC
One Huntington Quadrangle, Suite 3S09
Melville, New York 11747

2002-12A
PTE 92-5 (57 FR 5019, 02/11/1992)

Dear Mr. Goldberg:

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.

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 Planís 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 participantís life.

One of the Planís 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.

You have asked the following two questions relating to PTE 92-5:

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?

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?

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 -

  1. The plan pays, transfers or otherwise exchanges no more than the lesser of --

    1. The cash surrender value of the contract;

    2. If the plan is a defined benefit plan, the value of the participantís accrued benefit at the time of the transaction (determined under any reasonable method); or

    3. If the plan is a defined contribution plan, the value of the participantís account balance;

  2. Such sale, transfer or exchange does not involve any contract which is subject to a mortgage or similar lien which the plan assumes;

  3. Such sale, transfer or exchange does not contravene any provision of the plan or trust document.

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 participantís account balance in the defined contribution plan.

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.

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)

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

Footnotes

  1. In this regard, it should be noted that the Department stated in PTE 77-7 (42 FR 31575, June 21, 1977) that ď...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.Ē