A retirement plan sponsor wants to include life insurance coverage inside its qualified retirement plan. Under IRS rules, this is permitted only when the death benefit is:

Why A is correct

Life insurance may be included in a qualified retirement plan only as an incidental benefit; the plan's primary purpose must be providing retirement income. The IRS imposes limits (such as the 100-to-1 ratio for term coverage and the 25% of contribution limit for whole life) so that the life insurance does not overshadow the retirement purpose. This is the only limited situation in which life insurance is permitted inside a qualified plan.

Why the other options are wrong

• B) If the death benefit were the plan's primary purpose, the plan would not satisfy the requirements for tax-qualified retirement status.
• C) Incidental life insurance in qualified plans is funded through the same plan contributions that fund retirement benefits, not separately through voluntary employee contributions alone.
• D) The rule concerns the incidental death benefit of life insurance; a fixed annuity is a retirement income contract, not a life insurance death benefit.

Memory hook

Life insurance in a qualified plan is allowed only as a side dish; the retirement benefit is the main course.

Why A is correct

Qualified retirement plans may include life insurance only as an incidental benefit, because the plan's primary purpose must be retirement savings. Incidental limits apply, such as a death benefit generally limited to 100 times the projected monthly pension benefit in a defined benefit plan, or a limited percentage of the account balance in defined contribution plans. Life insurance inside a plan also creates taxable term cost to the participant. The limits ensure that the death benefit does not dominate the retirement purpose of the plan. This is a rare and highly restricted use of life insurance.

Why the other options are wrong

• Coverage amounts are strictly limited so that life insurance remains incidental to the plan's retirement purpose; unlimited amounts are not permitted.
• Incidental life insurance is permitted in qualified plans under the limits, so it is not prohibited in all cases.
• Life insurance inside a plan is not treated as a cash contribution; special rules on taxable term cost and incidental limits apply.

Memory hook

In qualified plans, life insurance is a side dish, not the main course — strictly incidental.