Death Benefit from a 412(i) plan

[Guest jigpsu100]

A spouse is entitled to a death benefit under a 412(i) plan. The plan states that the death benefit is the amount available under the insurance contracts. Is this amount includible in income by the surviving spouse? May the surviving spouse roll it over? Please let me know if any of you have experience dealing with this. The plan does allow for rollovers and the contract was paid for entirely by the employer. Thanks.

[AndyH]

What does the insurance agent say?

[mbozek]

Doesnt the insurence co. as payor file form 712 reporting the payment as LI proceeds which are exempt from income tax? Have you contacted the Ins co?

[Guest jigpsu100]

It's an accountant who also seems to be the insurance agent. He says that the death benefit passes the incidental limit test. The death benefit is two million dollars. I don't see how the 100 times rule passed and I don't really understand the 66 2/3 test (74-307) but I have no reason to question him. He also said that the amount is not taxable to the recipient. He didn't know why not. I assume its according to the normal life insurance rules via Code Section 101. If that's the case, there's no reason for the spouse to roll it over.

If you have any thoughts, let me know.

[AndyH]

I have no reason to question him

You have very good reason to question him. Your instincts are right. Somebody needs legal advice.

Calling Ned......

[Guest jigpsu100]

Even if they failed the incidental benefit test, it would be a problem for the employer/plan. I know amounts over the limit are not deductible and subject to a penalty for the plan (in addition to the listed transaction concerns). Meanwhile, what would be the consequence to the beneficiary? Wouldn't she still receive the death benefit and wouldn't it still be nontaxable to her?

[Guest Ned Ryerson]

Calling Ned......

Don't bother me. I am selling like I am silly right now.

My advice, buy more life insurance.

[mbozek]

Ther are two seprate issues involved here.

1. Are the proceeds exempt from income tax under the IRC because they are paid from a LI policy. This will be answered by the INs co that issued the policy.

2. Was the LI protection an excessive benefit under the IRC for a DB plan? This must be anwered by reviewing Rev. Rul 2004-20 and other rulings. If the coverage is excessive then the employer's deduction may be disallowed and the plan may have a qualification problem but this does not affect the exemption of the proceeds from income if the benefits are funded exclusively by LI.

[SoCalActuary]

The only concern I would add is on the tax-exempt issue.

Can the taxpayer show that the cost of insurance - PS58 - was declared as taxable income during the duration of the policy? If not, the tax exemption may be in doubt.