Death Benefits in a DB Plan

[Dennis Povloski]

I have a situation where a participant died prior to normal retirement. The death benefit is described as 100 times the monthly retirement benefit. The lump sum of the retirement benefit actually comes out quite a bit larger than the death benefit.

The way the document reads, the death benefit is:

"Upon the death of a Participant prior to the Participant's Retirement Date, the Participant's Beneficiary shall be entitled to a death benefit in an amount equal to the Policy proceeds payable as of the Participant's date of death.

"Such death benefit shall not exceed 100 times the Participant's anticipated monthly retirement benefit determined as of the Participant's Normal Retirement Date. Any amounts in excess shall inure to the Trust Fund and be used to reduce the future contributions of the employer."

Further down, it states:

"In the event of a Terminated Participant's death subsequent to the Participant's termination of employment, the Participant's Beneficiary shall receive the Present Value of such Participant's Vested Accrued Benefit as of the Anniversary Date coinciding with or next following the date of the Participant's Death."

This comes from Corbel's volume submitter DB document.

I understand that death benefits are incidental in a retirement plan, but it sounds like this would tend to provide a more valuable death benefit to a young person (who would have a smaller PVAB and be more likely to get more from the insurance), than to an older person (who would be more likely to have a larger PVAB, which could be larger than the death benefit..especially with low GATT rates in effect).

Does that seem odd to anyone else?

Also, in the event of a terminee becoming deceased, do they get the larger of the PVAB or the policy proceeds? It seems that the conditions of the insurance policy proceeds simply say death prior to retirement date, and the conditions for the PVAB simply say death after termination date....both of which apply to this participant???

Anyone else come across anything like this?

Thanks all!

[JAY21]

To me, more than an age issue, it's just the difference of being eligible to receive an "insured" death benefit (active paticipant) vs. an "uninsured" death benefit (terminated participant). Age doesn't appear to have any thing to do with it other than it's certainly possible to have an insured death benefit for a young "active" participant that is greater than an uninsured death benefit (PVAB) for a "terminated" participant. However, that's just the benefit (perk) of being an "active" participant.

I don't think the terminee gets the policy proceeds even though there may be a policy still on his life, as the plan is the beneficiary (not the terminee), and the terminee is not eligible for an "insured" death benefit since the plan states it's not going to pass along the policy proceeds to a terminee, just the PVAB. I think the key here is the plan owns the policy and is the beneficiary and the plan can choose what situation/criteria the plan will use to determine who is eligible to receive the proceeds of any policy upon death that the plan owns vs. the plan retaining and receiving the proceeds to its trust and reducing future contributions to the plan.

I believe this is fairly common language.

[could be me maybe not]

When these rules were written, 100 may have been close to an age 65 annuity rate in which case the insured active death benefit would always be at least equal to the pvab. That would still be true for most people younger than say age 60.

[flosfur]

I have a situation where a participant died prior to normal retirement.  The death benefit is described as 100 times the monthly retirement benefit.  The lump sum of the retirement benefit actually comes out quite a bit larger than the death benefit.

.....

Thanks all!

Someone selected a bad option. The Corbel (and other docs) provide other options too, such as:

1. Greater of PVAB and life policy procceds.

2. PVAB plus life policy proceeds minus cash value of policy.

and so on.

The worst available death benefit option (Corbel doc) is: Life proceeds minus cash value of the policy - which could end up being zero!!!

If the participants was married at death, then you should also check to see if the policy proceeds are greater than the Actuarial Equivalent of the qualified survivor annuity - it should be but one never knows.

[AndyH]

Didn't want to let this one slip by without a dissenting view. Does this make sense to anybody? Not me.

The worst available death benefit option (Corbel doc) is: Life proceeds minus cash value of the policy - which could end up being zero!!!

[Belgarath]

Well, I don't know the Corbel document. But I think you could have a life insurance policy that had been around for a lot of years where the cash value was pretty much equal to (or at least somewhere near) the death benefit - so under the death benefit option that flosfur quotes, it could be zero. Or at least very darned small.

Maybe one of the life insurance experts could chime in as to whether such a scenario is possible.

[could be me maybe not]

Isn't distribution of the cash value taxable (albeit reduced by accumulated PS-58 costs)? Isn't the cash value a general plan asset for funding purposes, so that it would be like distributing a stock?

[Ron Snyder]

Several issues have been identified, but not satisfactorily resolved:

1. Can a plan cause forfeiture of a participant's vested accrued benefit simply because the participant dies prior to retirement? Of course. However, the plan document must explicitly so state. Look at the language under vesting and forfeitures. Otherwise the participant is likely entitled to his vested accrued benefit PLUS the death proceeds of his life insurance policy. (Yes, Corbel has other options, but no plaintiff's attorney cares about them.)

2. Can the cash value of a life insurance policy ever equal or exceed the face amount of the policy? No. Under DEFRA's definition of a life insurance policy, no matter what the cash value grows to, a corridor death benefit will be provided that exceeds the cash buildup.

3. While insurance cash values are plan assets for funding purposes, they are in no way like distributing a stock. On death no policy is distributed. Under IRC 101(a) the death proceeds of the insurance policy are paid tax-free to the beneficiary. If the cash value is also distributed (which, as a plan asset, it may or may not be) it will be taxable to the beneficiary.

4. When the incidental death benefit rules were written, it was to make sure that a qualified plan was not primarily an insurance plan. 100 represented a reasonable approximation of the expected number of months after retirement that a participant might live. To provide a death benefit beyond the expected lifetime was not considered incidental. Other rationales were later endorsed that provided alternatives with greater death benefits than the 100 X rule, and they are now more commonly used (ie, the 25%-50% rules, the 2/3-1/3 rule, etc.).

The only comment I agreed with on this thread was from AndyH!