Self-Insured Death Benefit

[Guest Benefitsrock]

An employer provides employees with a nominal death benefit ($5,000). The benefit is paid from the employer's general assets, it is not an insured arrangement. I believe the amount is taxable, reportable on a 1099-R and potentially subject to withholding. Does anyone agree/disagree? I would greatly appreciate any thoughts/insights. Thanks.

[J Simmons]

Taxable? Agreed, since the 1996 law change.

Reportable on Form 1099-R? Agreed.

Potentially subject to withholding? Don't know of what would require that. I'm curious about what leads you to this thought?

[Guest Benefitsrock]

Thanks for your reply. I think we may have to withhold given that withholding applies to the taxable portion of payments made from pension, profit-sharing, deferred comp. plans, etc. While I understand the death benefits I described are different from these benefits, they are somewhat similar. I also generally am conservative such that if it is unclear whether to withhold, withhold.

[Guest Harry O]

Death benefits are not subject to income tax or FICA withholding.

[Guest Benefitsrock]

Can you provide a source? Given that Code Section 101(a) doesn't apply because the death benefits are simply a contractual obligation to pay an amount and are not an "insured" arrangement, I don't know how the benefits can avoid being subject to taxation.

[masteff]

Can you provide a source? Given that Code Section 101(a) doesn't apply because the death benefits are simply a contractual obligation to pay an amount and are not an "insured" arrangement, I don't know how the benefits can avoid being subject to taxation.

Subject to taxation, yes, but here we're speaking to withholding. There's no mandatory w/holding requirement on death benefits.

[Guest Benefitsrock]

I appreciate your reply. I may be pushing it but can you provide a source that says there isn't a withholding obligation?

[Don Levit]

Benefitsrock:

The arrangement is not subject to income tax.

See Private Letter Ruling 199921036.

Here, the benefits are entirely self-funded.

"Federal tax cases have held life insurance contracts to exist in situations where there is not a standard commercial life insurance contract between the insured and the insurer."

"Taxpayer's death benefits are paid from Taxpayer's general account, rather than from a particular fund. Under Taxpayer's representation that it has ample funds to pay Plan benefits, this difference with Odom should not affect the result."

Conclusion: "Amounts received as death benefit payments from Taxpayer are amounts received under a life insurance contract that are excludable from gross income under 101(a)."

Don Levit