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414(h)(2) Death Benefit


mctoe
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Hi,

Public Safety Officer dies during the performance of duties.  Surviving spouse is entitled to certain death benefits.  One such benefit is the value of the decendent's 414(h)(2) balance (employer pick up).  This specific benefit is provided to the spouse as a lump sum.  Any thoughts on the federal taxation to the surviving spouse regarding the lump sum?

Thank you.

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mctoe, is this a defined benefit plan with an account-type feature, e.g. DROP? I do a fair amount of public safety plan work but have never seen a 414(h)(2) account broken out as a specific benefit, which is why I am asking. 414(h)(2) is just a way to make the employee contributions pre-tax if done correctly.

There are some subtle rules for determining when a public safety plan's death benefit following a line of duty death is "on account" of the death and not just a regular pension payment, so as to qualify for exclusion from income under Treas. Reg. 1.104-1(b). Many PLRs on this subject. Typically, a DC account would not qualify, but every plan is worded differently and you need to review its specific provisions.

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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Hi Luke,

Thank you for responding.  Some more info.  This is a defined benefit plan, nothing to do with a DROP.  Basically, when employee (decedent) was hired he was assigned a contribution rate (% required to be contributed to DB plan).  Let's say it was 7.5%.  The employer picks up 5% of the required amount and the employee is responsible for the 2.5%.  The 5% contributed by the employer goes into an "account" and earns interest.  Upon the line of duty death of the employee (Public Safety Officer) the surviving spouse is entitled to three benefits; return of decedent contributions (taxable unless rolled over), a non taxable pension/annuity benefit, and the dollar value of the account (lump sum) the employer contributed to (the 5% with interest).  The first two items are straightforward, I am stuck on the 5% employer contribution.  Everything I have reviewed in the IRC and various Public Safety Officer line of duty laws there is no mention of how a lump sum benefit is taxed.  Is it simply treated as non-taxable as per Treas. Reg. 1.104-1(b)?  I am aware of the "Don't Tax Our Fallen Public Safety Heroes Act", but I do not think it is relevant in this case.   

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24 minutes ago, mctoe said:

Everything I have reviewed in the IRC and various Public Safety Officer line of duty laws there is no mention of how a lump sum benefit is taxed.  Is it simply treated as non-taxable as per Treas. Reg. 1.104-1(b)?

I don't think the form of payment (lump sum vs. annuity) makes a difference. The general principle is that the amount or a portion of it must be paid must be "on account" of the on-duty disability or death. You may want to review some of the PLRs to get a sense of how the rule is applied.

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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