(b)lines Ask the Experts – Grandfathered Life Insurance Contracts in 403(b) Plans

“I work for an Employee Retirement Income Security Act (ERISA) 403(b) plan sponsor. In a review of some frozen contracts to which contributions are no longer made, I discovered what appear to be some life insurance contracts. I am confused—I thought life insurance was no longer permitted in 403(b) plans! Is there some grandfathering of old contracts about which I should be aware?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

You are spot on. As life insurance contracts do not meet the definition of an annuity contract, they are generally not permitted in 403(b) plans. That said, certain grandfathered contracts may continue to be held. See Treas. Reg. sections 1.403(b)-6(g), 1.403(b)-11(f). 

Specifically, if an insurance contract provides only incidental life insurance protection and was issued prior to September 24, 2007, it may be held as part of a 403(b) plan. To be considered incidental under the plan, no more than 50% of aggregate contributions can be used to purchase an ordinary life insurance contract (25% for term or universal life insurance contracts). Further, the insurance contract is subject to restrictions under section 403(b), such as the timing of permissible distributions (e.g., after age 59½) and the contribution limits of sections 402(g) and 415.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.