Election of Form of Payment for Death Benefits

[smm]

I'm reviewing a "relatively simple" (LOL!!) deferred compensation plan that will pay employee $XX,000 per year for 10 years when he terminates employment following NRA (no issue there). If he dies before the NRA, the agreement provides that beni gets either the sum of $XXX,000 paid as a lump sum, or $XX,000 per year for 10 years, as elected by the employee.

Is such an election permissible?? To the extent it is (and I'm not sure), presumably it must be irrevocable. Maybe it is permissible if made w/n 30 days of becoming a participant in the plan b/c this is a new plan. Any tthoughts on this??

Thanks.

[XTitan]

Allowing the participant to elect the form of the death benenfit is common, but it needs to be made prior to earning a legally binding right to the benefit, which should have been at the time this benenfit was negotiated. I'd be concerned about using the 30 day rule in case the employee is already participating in a plan in which this plan can be aggregated with. Such an election doesn't need to be irrevocable; changes can't take place for at least 12 months, but it is not subject to the 5 year delay.

Given we are in a transition year, I'd consider soliciting an election and/or amending the agreement to provide a default payment, depending on what counsel is more comfortable with. You might also want to specify what happens if death occurs post-separation while in payout.

[smm]

Thanks for your reply - especially on the July 4th weekend. Why wouldn't a change be subject to the 5 year delay? According to my reading of the regs., elections by both participants and benis are subject to the subsequent election - 5 year dalay rule. Also, if this is a new plan and the participant does not participate in any other plans, isn't the 30 day rule applicable? I agree about the default and if death occurs post separation during distribution.

[XTitan]

That just tells you that my weekend is going about as smoothly as yours.

Participate in other plans or eligible for other plans? Might make a difference.

Changes to the time and form of payment upon death, disability or hardship are not subject to the 5 year delay (just the 12 months prior). Being in a transition year makes the 1 year/5 year moot anyway.

The 30 day rule with respect to ad hoc grants should apply, provided there is at least 12 months between date of election and date of vesting (NRA). The 30 day rule for initial deferral elections wouldn't apply because that's only for services performed after the election.