Recently, the IRS issued Proposed Regulations, Revenue Rulings, and a Revenue Procedure in an effort to stop what it considers the abusive use of certain life insurance products in defined benefit retirement plans. These Regulations specifically target misuse of insurance contracts that provide “springing cash values” far in excess of the benefits provided under the plan. A "springing cash value" policy is unique in that the cash surrender value temporarily decreases to much less than the premium used to purchase the policy, at that time the employee (usually a highly compensated employee) buys the policy out of the plan. Once the policy is out of the plan the cash value "springs back up" to its high cash surrender value.

Section 412(i) plans are by definition qualified plans (defined benefit) funded entirely by insurance and/or annuity contracts. The IRS has designated certain insurance arrangements as "listed transactions," see the link at the bottom for more information and a definition of listed transaction.

Rev. Ruling 2004-20
Under this ruling, a qualified pension plan will not satisfy Section 412(i) if it contains life insurance and/or annuity contracts for the benefit of a participant that provide a greater benefit than the plan calculated benefit at normal retirement age. In addition, a life insurance contract may not exceed the plan's death benefit by more than $100,000. Employer deductions are limited and deductions to buy excess life insurance benefits have now been designated as "listed transactions."

Rev. Ruling 2004-21
Under this ruling, the right to purchase a life insurance contract from a retirement plan must be available on a nondiscriminatory basis to all participants. The features of the life insurance contract for the NHCEs must be of "inherently equal or greater value" than the rights that HCEs have to purchase such contracts.

Rev. Proc. 2004-16
Contains interim guidance regarding the valuation of life insurance until final regulations are issued.