Life insurance inside a defined benefit plan can be a powerful tool for retirement and estate planning. But when policies are included within these plans, special rules apply. This is especially true when it comes to PS 58 costs.
These costs represent the value of life insurance protection that is considered a current benefit to the participant and, as such, are treated as taxable income. Understanding how PS 58 works is essential for making informed decisions about structuring a plan that includes life insurance.
In this guide, we discuss how these costs work. We also will show you how to discuss the issue with clients so they can understand why they will receive a 1099-R at the end of the year. Let’s dive in!
What is a PS 58 Cost?
PS 58 refers to IRS Revenue Ruling 74-307 and its predecessor, Revenue Ruling 55-747. It determines the cost of pure life insurance protection provided to a plan participant when a policy is held inside a qualified retirement plan.
When a defined benefit plan owns a life insurance policy on a participant, part of the annual premium goes toward cash value accumulation, while another portion covers pure death benefit protection. The IRS views the latter as an economic benefit to the participant, which must be reported as taxable income.
This imputed income is what’s referred to as the PS 58 cost, and it must be included on the participant’s W-2 or Form 1099-R depending on the plan structure and distribution status.
Why Use Life Insurance in a Defined Benefit Plan?
Life insurance inside a defined benefit plan offers several advantages:
- Enhanced contributions: Life insurance allows higher contribution limits in some cases, since the cost of the policy (up to certain limits) can be funded with pre-tax dollars.
- Death benefit protection: Ensures that if the participant passes away before retirement, beneficiaries receive a substantial benefit.
- Tax-deferred growth: The cash value component of the policy grows tax-deferred inside the plan.
- Estate planning: When paired with a trust or buy-sell agreement, life insurance can provide liquidity or equalize inheritances.
However, the PS 58 cost introduces a taxable component that needs to be understood and planned for.
How PS 58 Cost Is Calculated
The PS 58 cost is based on the Table 2001 rates published by the IRS, which provide annual cost per $1,000 of life insurance protection, based on age and gender. While insurers can use their own term insurance rates if they are more favorable and approved, most plans default to the standard IRS table.
Here’s how the calculation typically works:
- Determine the “net amount at risk”: This is the difference between the policy’s death benefit and its cash value at the end of the year.
- Use Table 2001 rates: Find the applicable cost per $1,000 of coverage based on the participant’s age.
- Multiply: Take the net amount at risk divided by 1,000, and then multiply by the cost rate.
Example:
If a 55-year-old participant has a $2 million death benefit and a $200,000 cash value, the net amount at risk is $1.8 million.
If Table 2001 lists the rate for a 55-year-old as $2.76 per $1,000:
- $1,800,000 / 1,000 = 1,800
- 1,800 × $2.76 = $4,968
This $4,968 must be reported as taxable income to the participant for the year.
Tax Implications of PS 58 Costs
PS 58 costs are treated as phantom income—the participant pays tax on an economic benefit they don’t actually receive in cash. This income is reported annually, even though the participant may not receive any plan distributions for many years.
Tax Reporting
- If the plan is employer-funded, the PS 58 amount is included on the participant’s Form W-2 as taxable income.
- If the policy is transferred out of the plan or distributed, additional taxes may apply unless rolled over or structured properly.
Impact on Plan Contributions
Although PS 58 costs create some taxable income, they do not reduce the employer’s deduction for plan contributions. The plan itself can fund the policy premiums in full, including the portion that results in a taxable benefit.
Special Planning Considerations
When integrating life insurance into a defined benefit plan, the following considerations must be factored in:
1. Policy Type
Defined benefit plans can include whole life, universal life, or variable universal life policies. The structure affects how much premium goes toward cash value versus insurance protection, which in turn influences PS 58 costs.
2. Split-Dollar Planning
In some cases, a split-dollar agreement may be used, where the plan owns part of the policy (typically the cash value portion), and the participant or their trust owns the death benefit portion. This requires careful coordination but may reduce or shift the PS 58 burden.
3. Trust Ownership
If an Irrevocable Life Insurance Trust (ILIT) is involved, it can receive the policy proceeds outside the participant’s estate. However, care must be taken to avoid transfer-for-value rules and potential estate inclusion if not properly structured.
4. Distribution at Retirement
When a participant retires, they may choose to purchase the policy from the plan or have it distributed in kind. The fair market value of the policy becomes taxable at that time (often calculated using IRS Form 712).
The prior PS 58 costs reported over the years may reduce the policy’s cost basis, potentially lowering future taxes.
Is a Cash Balance or Defined Benefit Plan Right For You?
PS 58 vs. Table 2001 Alternatives
Some carriers offer carrier-specific term rates approved by the IRS that are lower than Table 2001. If these rates are used, the imputed income may be reduced—helping to minimize the tax burden for participants. However, such use must be supported by the insurer and documented thoroughly.
Is Life Insurance in a DB Plan Worth It?
P.S. 58 costs do not invalidate the benefits of including life insurance in a retirement plan, but they must be planned for. For many high-income individuals—such as physicians, attorneys, and business owners—the advantages of:
- Higher contributions,
- Immediate death benefit coverage,
- Pre-tax funding of premiums, and
- Estate liquidity
…can outweigh the annual imputed income cost.
But the benefits only materialize when the plan is structured correctly, policies are carefully selected, and distributions are planned with the tax consequences in mind.
| Aspect | Explanation | Tax Impact | Compliance Notes |
|---|---|---|---|
| Definition | PS-58 (now Table 2001) is the IRS measure of the annual economic benefit from life insurance inside a qualified plan. | Represents the taxable value of current death benefit protection. | Rates published by IRS; must be used consistently. |
| Calculation | Annual rate per $1,000 of coverage multiplied by face amount for participant’s age. | Determines the imputed income each year. | Use Table 2001 or carrier’s lower term rate if allowed. |
| Tax Reporting | Plan administrator reports PS-58 cost as income to the participant (Form 1099-R or W-2). | Participant pays tax on this small annual amount. | Increases participant’s basis in the policy, reducing tax later. |
| Basis Treatment | All reported PS-58 costs accumulate as policy basis for participant. | Reduces taxable amount when policy is later distributed. | Critical to track annually for accurate taxation at distribution. |
| Distribution or Surrender | Policy distributed at retirement is taxed at fair market value minus accumulated PS-58 basis. | Prevents double taxation on the insurance economic benefit. | Failure to account for basis inflates taxable income unfairly. |
| Purpose | Ensures life insurance inside a DB plan remains a taxable economic benefit, not a hidden tax-free perk. | Balances tax deferral on cash value with taxation of insurance protection. | IRS scrutiny is common; proper reporting avoids penalties. |
Final Thoughts
P.S. 58 costs are an important aspect of using life insurance within a defined benefit plan. They represent the value of the death benefit protection provided to the participant and must be included in their taxable income annually. While this creates a small current tax liability, it is often dwarfed by the significant tax-deferred growth, increased contributions, and estate benefits that life insurance integration can deliver.
Before implementing life insurance in your defined benefit plan, it’s essential to consult with experienced professionals who understand plan design, IRS rules, and insurance structure. With the right guidance, you can build a retirement strategy that offers protection, tax savings, and long-term wealth transfer opportunities—all in one integrated solution.
