Payment of benefits upon death - tie to life insurance?

[Guest Seg]

May a plan subject to 409A provide that upon the death of a participant the amount of benefits paid as a lump sum will be equal to the amount of life insurance proceeds received by the employer? The remaining account balance would then be paid over a period of years.

Because the employer would retain the ability to control the amount of life insurance it holds on the participants, I am worried that such a plan provision would be deemed an impermissible acceleration of benefits.

[Guest Seg]

No one will even take a guess? Or is my question poorly worded?

[Steelerfan]

You need to read the preamble to the regs section VII B 3. Based on what you've said, the amount would be subject to manipulation and thus not deemed to be a fixed schedule of payments.

[jpod]

Is the account balance offset by the amount of life insurance received? If so, I agree that this is at least a real issue under 409a.

Or, is the life insurance in addition to the account balance, and the "received by" language is merely a drafting technique to hedge the possibility that the life insurance company won't pay off (e.g., due to suicide or some other take-out provision), or will be slow pay? If this is the case, I don't think you have a 409A issue.

[Steelerfan]

Or, is the life insurance in addition to the account balance, and the "received by" language is merely a drafting technique to hedge the possibility that the life insurance company won't pay off (e.g., due to suicide or some other take-out provision), or will be slow pay? If this is the case, I don't think you have a 409A issue.

Not sure why you think this would alleviate 409A concerns. Even if the amount were in addition to the account balance, you still have to have a fixed schedule of payments. The key would seem to be whether the amount payable in a lump sum is subject to change by an action of the employer subsequent to the time when the time and form of payment is required to be fixed. In that case there would be a 409A violation because the "formula" is discretionary and the payments are not properly "fixed."

I would be worried about this type of arrangement becase, as stated in OP, the employer has contol over the amount of LI and thus could "arrange" for a larger lump sum to be paid to the executive's beneficiary after the time and form of payment is required to be set by subsequently increasing the amount of coverage. Also it is not clear whether the executive has the subsequent ability to influence the employer in the amount of LI that will be received by ER when he dies.

I guess my question would be--can the amount of LI be predetermined when the time and form of payment must be set in the plan? If so, then you are probably OK under 409A.

[Mark Whitelaw]

Rather than integrate the life insurance into the 409A plan, could you leave the 409A plan alone and set up an endorsement split dollar plan or DBO and have the participant's death benefit amount be the life insurance amount offset by the 409A payment.

[Don Levit]

I am curious if the amount of benefits could fluctuate over time, if set in advance by a formula which leaves no discretion to the empoloyer?

Don Levit

[Guest Seg]

The amount of benefits would be predetermined, the only variable would be that the timing of the receipt of the benefits would be tied to the amount of life insurance policy proceeds the company received on account of the participant's death. A lump sum would be paid upon death equal to the policy proceeds collected, the remainder would be paid out over a period of years.

For example, death is a triggering event under the plan. Assume a participant had an account balance of $1,000,000 at date of death. Assume further the company holds $400,000 of life insurance on the participant. The plan would provide that a lump sum equal to policy proceeds received (i.e., $400,000) would be paid upon death, with the remainder (i.e., $600,000) paid out over a period of 10 years.

If the company allowed the policy to lapse, or if it never took out a policy and thus collected no proceeds, the $1,000,000 would be paid out over 10 years.

I have told the client its proposed plan term is not acceptable under the final 409A regulations because it would allow for an impermissible acceleration of benefits because the company would have the ability to manipulate the amount of insurance held, and thus accelerate or slow down the payment of the benefits.

Granted, I don't think the 409A regulations were aimed at this of a plan provision, as the participant would have to actually die (a high price to pay just for a little manipulation of the timing of payment), but nonetheless I don't think it can be done.

I was just hoping for a reality check from other practitioners, as the client would like to include such a provision. I have told them they can still use life insurance to fund the benefits, but the lump sum payment at death could not fluctuate based on the amount of proceeds received.

[Don Levit]

Seq:

I have not read the 409A regulations, so take this with a grain of salt.

If the employer was required to keep the life insurance in force, would this violate 409A?

Does 409A apply to defined benefit plans, as well as defined contribution plans?

If so, might this arrangenment be considered a defined contribution plan?

Don Levit