Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-56

1968-1 C.B. 169

Sec. 401

IRS Headnote

The extra premium added to the cost of an insurance contract by reason of the substandard health condition of an owner-employee is not included in determining whether a contribution to a qualified plan is an excess contribution within the meaning of section 401(e)(1) of the Internal Revenue Code of 1954.

Full Text

Rev. Rul. 68-56

Advice has been requested whether an extra premium added to the cost of an insurance contract by reason of the substandard health condition of an owner-employee is included in determining whether a contribution to a qualified plan is an excess contribution within the meaning of section 401(e)(1) of the Internal Revenue Code of 1954.

A sole proprietor established a profit-sharing plan that satisfied the requirements for qualification under section 401 of the Code. The plan provides that contributions shall be the lesser of $2,500 or ten percent of earned income for each year plus the current cost of providing incidental life insurance protection. In 1965 the sole proprietor had earned income of $25,000 and contributed $2,700 toward the purchase of a retirement income contract. Of this amount $150 was attributable to insurance coverage. An additional $50 was charged because of the substandard health condition of the owner-employee involved and did not result in any increase in the cash value of the policy.

Section 401(e)(1) of the Code provides, in pertinent part, that the term `excess contribution' means the amount of any contribution made on behalf of an owner-employee which exceeds the lesser of $2,500 or ten percent of the earned income for the taxable year derived by such owner-employee from the trade or business with respect to which the plan is established.

Section 1.401-13(b)(1)(ii) of the Income Tax Regulations provides that, for purposes of determining whether the amount of any contribution made under the plan on behalf of an owner-employee is an excess contribution, the amount of any contribution made under the plan which is allocable to the purchase of life, accident, health, or other insurance is not taken into account.

Since the additional $50 was added to the cost of the policy in this case on account of the substandard risk and the cash value of the policy was not thereby increased, such additional amount is considered as being an additional cost of current life insurance protection.

Accordingly, it is held that the extra premium added to the cost of the insurance contract by reason of the substandard health condition of the owner-employee is not included to the instant plan is an excess contribution within the meaning of section 401(e)(1) of the Code.