Life insurance in company pension



I have a new client that is the sole proprietor of a PC, no eligible
employees. He has a 401(k) that has about $40K in MFs, but it's main
holding is a whole life insurance policy for $1MM.

The best I can tell, the policy was designed so that the cash value
remain low for the first 20 years or so and then rapidly begin to
climb. This will allow him to buy the policy from the pension fairly
cheaply and then have it rapidly appreciate. [I am fully aware that
life insurance is not the best investment he could have made if he is
looking for cash value and not death benefit protection, but that is
another matter.]

Here's the rub, the policy was designed so that he makes the maximum
contribution allowed to the plan and then the ENTIRE amount goes to
paying the premium. I have heard/read from various sources that there
are limits to how much of a contribution can go to premium, but I have
not found a definitive answer nor can I find anything in the IRS pubs.

Anybody ever run into this? And of equal importance, if he has been
violating the rules of the plan for 6 years now, what does he do to
rectify the situation?



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