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?
Thanks