For qualified pension plans and where employer is paying the premium out of employer contributions, the participants must annually recognize the portion of the premium paid for the current year's insurance coverage, reporting the economic benefit as taxable income. The amount reported as income is equivalent to the premium paid on a term life insurance policy for 1 year for the face value of the plan policy.
When calculated for a participant, the plan administrator issues the participant a Form 1099-R to include in gross income for the year. The participant's account receives a basis for the cost and the participant is not taxed again on this basis when the insurance contract is distributed to the participant or when life insurance proceeds are distributed to the beneficiary.
See:
http://irs.gov/retirement-plans/fully insured 412e3 plans
