Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Current Insurance Cost: From P.S. 58 to Table 2001

The rules for determining the Current Insurance Cost have changed over the years. Originally, Rev. Rul. 55-747, 1955-2 CB 228, provided a table, called “P.S. 58,” to calculate the amount includible in the participant’s gross income. This ruling was later modified by Rev. Ruls. 66-110, 1966-1 CB 12, and 67-154, 1967-1 CB 11, which expanded Table P.S. 58 and also provided that the insurer’s lowest published rate for one-year term insurance available on an initial issue basis for “all standard risks” could be used if that rate was lower than the “P.S. 58 cost.” Although the “P.S. 58-or-insurer’s-actual-rates-if-lower” regime lasted for several decades, there was a continuing problem: The P.S. 58 table rates were unrealistically high, while some parties were tempted to use alleged “insurer’s actual rates” that were unrealistically low, in the sense that the insurer rarely if ever sold one-year term insurance at such rates. In Notice 2001-10, 2001-5 I.R.B. 459, the IRS revoked Rev. Rul. 55-747, thus killing Table P.S. 58; published a new table, “Table 2001,” with considerably lower rates; and announced its intention to issue further rules on this subject, and to prevent abuse of the “insurer’s actual rates” alternative. Notice 2002-8, 2002-4 I.R.B. 398, revoked Notice 2001-10 (except for Table 2001, which was re-issued), and announced that the IRS would issue proposed regulations providing “further guidance” on the tax treatment of insurance held in QRPs. In the meantime, Notice 2002-8 (Part III, 2) provides “interim guidance” on the tax treatment of life insurance held by a QRP, summarized in the next paragraph. Though the IRS has since issued extensive guidance on other aspects of employment-related life insurance (including split-dollar, § 79 , § 83 , and distribution of policies by QRPs), it has issued no further guidance on how to determine the amount applied to purchase pure insurance in QRP-owned life insurance since Notice 2002-8. Under Notice 2002-8, for 2002 and later years (unless and until changed by the promised future “guidance”), the amount reportable as the value of the employee’s current insurance protection under a plan-owned policy must either be determined under Table 2001 or (if certain conditions are met) be based on the insurer’s actual term rates, if lower. Taxpayers may determine the Current Insurance Cost using the insurer’s lower published premium rates “that are available to all standard risks for initial issue one-year term insurance” instead of the Table 2001 rates. However, the IRS reserves the right to take away this option, in future regulations, for “arrangements entered into” after the effective date of such future regulations. For arrangements entered into before the effective date of future regulations, the insurer’s actual term rates can be used, but only if the following requirements are met: For any arrangement entered into after January 28, 2002, the IRS (for years after 2003) “will not consider an insurer’s published premium rates to be available to all standard risks who apply for term insurance unless (I) the insurer generally makes the availability of such rates known to persons who apply for term insurance coverage...and (ii) the insurer regularly sells term insurance at such rates to individuals who apply for term insurance...through the insurer’s normal distribution channels.” Thus, post-January 28, 2002, “arrangements” must meet this stricter standard, beginning in 2004, if the parties want to use the insurer’s lower term rates. If this standard is not met, the employee will have to report income (or pay a share of the premium himself) based on the Table 2001 rates. Current Insurance Cost: Using insurer’s actual rates