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Participant elects a lump sum but dies before payment


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We had a participant in our pension plan elect a lump sum.  However, he died prior to the benefit commencement date.

Do we still pay out the benefit in the same lump sum amount elected (to the surviving spouse), or should it be recalculated as a death benefit (which would result in a lower amount to the surviving spouse)?

Thank you!

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38 minutes ago, Luke Bailey said:

If the plan document, even after a careful reading, does not address this either way, then the plan administrator probably has a choice of interpretation to make, and many factors would be involved. Note that I would definitely review the language for the death benefit to see whether the "if" clause says something like, "If the participant dies before his or her annuity starting date,..." or something else. But even if (as is likely) the "if" clause does refer to the ASD, you need to check for whether the provision for payment of a lump sum indicates that it will be paid on the day that would have otherwise been the ASD if taken in the form of the default annuity, vs. saying it will be paid "on the date as soon as administratively feasible after the election," which would be ambiguous.

I have not seen a DB plan that directly and consciously addresses the issue (e.g., "If the participant elected a lump sum, but dies before the ASD, then..."), although I hope they exist, but I have seen plans with a provision that if the participant elected a 100% J&S but died before the ASD the plan sticks with the 100% J&S. If your plan has such a provision it could also guide the analysis on the lump sum issue, since the administrative issue is similar. 

Thank you, that is very good advice.  So, in other words, the Plan language will control here and there isn't some section of the Code (or other applicable law) that mandates a certain treatment?

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2 hours ago, HCE said:

Thank you, that is very good advice.  So, in other words, the Plan language will control here and there isn't some section of the Code (or other applicable law) that mandates a certain treatment?

HCE, there is certainly no specific section of the Code or ERISA that is going to cover this explicitly. There is case law that would tend to support a mechanical interpretation of the plan, but depending on the wording of the plan and other facts and circumstances there might be some room for interpretation of the provisions and the application of common sense and a sense of fairness.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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1 hour ago, Luke Bailey said:

HCE, there is certainly no specific section of the Code or ERISA that is going to cover this explicitly. There is case law that would tend to support a mechanical interpretation of the plan, but depending on the wording of the plan and other facts and circumstances there might be some room for interpretation of the provisions and the application of common sense and a sense of fairness.

Thanks again, Luke!

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Agree with Luke, need to review plan document language carefully, especially references to the annuity starting date. However, annuity starting date has a legal definition and it is different for benefits payable as an annuity versus a lump sum. For a lump sum the ASD is the date that all required conditions necessary to pay the lump sum have been satisfied - essentially, the participant is eligible for the distribution and a valid election has been made with the proper forms executed and submitted to the plan administrator, including spousal consent if required. It is not just the check-cutting date. For example, if all forms were submitted on 9/15 and participant was eligible to get paid then, dies on 9/25 before scheduled check date of 10/1, I think you can make argument that 9/15 was the ASD for lump, he was alive on the ASD and therefore pay the lump sum to his surviving spouse.

I have seen a few plans that specifically address the issue of election then death before ASD, but they are few and far between (like large, complex, individually designed plans).

Whatever the Plan Administrator decides/interprets (with your consultation) should be documented, including specific facts and reasoning, in the event of IRS examination and/or a similar future occurrence.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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In what way did he "elect" a lump sum? 

Do you claim that you did not have notice of that election of a lump sum?

How is "benefit commencement date" defined? 

Does "benefit commencement date" mean the same thing for a lump sum payment and an annuitized payout?

How is "death benefit" defined? 

Is the cause of death a factor in whether there is or is not a death benefit? 

How is the death benefit computed?

If he hadn't elected a death benefit would you have been required under ERISA to pay a survivor benefit to the surviving spouse? 

Have you computed the present value of that survivor benefit? 

Is it more or less than the lump sum?   

How much will it cost you in legal fees paid to your attorneys and to the attorney for the surviving spouse if you have paid her the lowest possible amount?   

What is the dollar difference between the present value of the survivor annuity and the lump sum and the death benefit? 

Can the lump sum or the death benefit rolled over by the surviving spouse to an IRA or other eligible retirement account?     

 What are the differences between the lump sum payment and the death benefit?  

Is it possible that the death benefit is actually a separate benefit in the form of  life insurance?  [I had a case many years ago where a county pension plans was drafted in such a way that, unbeknownst to the county, there were survivor benefits payable to the non-spouse beneficiary, and also the decedent's surviving child.   https://scholar.google.com/scholar_case?case=14512325294449180586&q=angerman&hl=en&as_sdt=4,21

 

David

 

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