In PLR 200806013 (November 15, 2007), the IRS ruled that the payment of premiums on qualified long-term care insurance by a 401(k) plan would be treated as a taxable distribution in violation of the distribution restrictions of section 401(k)(2)(B). Click here for a copy of the ruling.
The ruling, which was originally requested in 2001, considered a well-conceived structure to make long-term care insurance available in a 401(k) plan. Participants would elect the coverage, which would be subject to the incidental benefit rule. Premiums would be paid from either a non-elective or elective contribution account (both of which were subject to section 401(k)(2)(B)) of the participant. The policy, which was required to be a qualified long-term care contract as defined in section 7702B, would be owned by to the 401(k) trust, and benefits would be payable to the trust. There would be no assignment of benefits to or by the participant while the policy was held by the trust. The trust would make in-service distributions of the policy or policy benefits to the participant either (i) from the non-elective contribution account if the participant was at least age 55 with 5 years of service; or (ii) from either the non-elective or elective contribution accounts if the participant, spouse or dependents incurred or were reasonably certain to incur long-term care expenses that qualified as a hardship. Upon occurrence of an event permitting plan distributions, the policy could be surrendered, distributed in kind to the participant, or rolled over to an IRA of the participant or spouse.
The taxpayer requested a series of nine rulings on the proposed structure. The linchpin was a request that a participant who elected coverage would not be currently taxable on the cost of the long-term care insurance. The other requested rulings would have addressed, generally:
- The treatment of the policy as a permitted incidental benefit;
- The treatment of policy benefits as section 415 annual additions to the plan;
- The exclusion of policy benefits paid to the participant under section 105;
- The permissibility of proposed in-service distributions; and
- The availability of the proposed IRA rollover.
The IRS reached only the first ruling request. Relying on Revenue Ruling 61-164 and following the August 2007 proposed regulations under section 402 on accident or health insurance provided through a qualified plan, the IRS ruled that the payment of the premiums by the plan would be treated as a currently taxable distribution to the participant electing that coverage, under section 402(a). The IRS then concluded that the deemed distribution of long-care insurance premiums would be a distribution prior to age 59-1/2, death, disability, severance from employment or other permissible event under section 401(k)(2)(B). (The IRS did not speak specifically to the proposed hardship provision.) Because the distribution thus would disqualify the 401(k) plan, the IRS considered the other ruling requests moot.