Deceased participant w/ remaining non-taxable base

[Guest MikeH]

I need some assistance from the community with the following scenario.

We had a DB participant pass on in January 2003 who was receiving a single life annuity. As part of a legacy benefit, this participant had employee contributions that they were receiving a non-taxable portion with each monthly annuity payment. The question is, now that the participant has passed on, what should be done with the remaining balance of their non-taxable base? For example, the participant has a remaining non-tax base balance of $2000 as of 1/31/2003 which they were receiving apportionments of $30 per month over the life of the annuity. Since there is a remaining balance of the non-forfeitable employee contributions, do we cut another check for the remainder of the employee contributions and pay to the beneficiary? Any other alternatives?

Thanks,

MikeH

[Guest kdfox2]

It's been many years since I worked with a contributory Plan - probably around 1998 was my last time; however, this is how I recall handling this type of situation way back then:

If the total amount of the annuity paid to the retiree from ASD through date of death is greater than the beginning balance of the non-tax base balance, nothing further is payable to the beneficiary. The reasoning was that an amount equal to the total non-tax base balance amount had been received by the participant at the time of death.

For example, suppose the retiree had a non-tax base balance of $3,000 on his ASD and began a single life annuity of $500 with $10 of it as non-tax basis. He received the annuity for 1 year exactly before passing away, making the total amount of benefit paid to him $6,000. Since this amount is greater than the beginning $3,000 non-tax base balance amount, nothing is paid to the beneficiary. Even though he was only actually paid $120 as non-tax basis, he had already received more than $3,000 worth of payments from the Plan.

Unfortunately, since it's been so long, I do not recall the code cites that backed up the decision to handle the situation this way.

Good luck!

[david rigby]

There are (at least) two issues:

1. What the plan says about "recovery" of the original employee amount. I think that the summary provided by kdfox2 is the most common.

2. What about the tax-related questions. Using the above example, this is what I recall: The employee contributions are being recovered at the rate of $10 per month. Since the employee received only $120 of the original $3000, then the balance is taken as a tax deduction. IRC section 72 is the relevant cite. Note that the $3000 is assumed to be the employee contributions without interest.

Any other, more learned, opinions?

(Of course we are back to the irony of filing a tax return, so you can take the deduction, in the year of death.)