Not so. Transactions of this nature are allowed under a Department of Labor prohibited transaction class exemption. What is required is for the effect on the plan to be revenue neutral. The amount paid by the participant to the plan for the policy should follow the safe harbor provisions. Meaning the “interpolated terminal reserve” or an equivalent algorithm devised by the IRS. In the early years of a policy, this can mean a higher purchase value than the cash surrender value of the contract. Additionally, from the standpoint of the Department of Labor, all participants must be treated consistently.
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