Death benefit from DB Plan

[Guest lil]

We administer a defined benefit plan that has term life insurance on participants. Per the document, beneficiaries can receive the larger of either the value of the life insurance or the present value of their accrued benefit. We have recently had a participant die and the present value of the accrued benefit is larger than the life insurance and they have elected a lump sum payment. The beneficiary is the spouse.

The plan was suppose to be the beneficiary of the policies. We are now having some problems with the insurance company who wants to pay the proceeds to the beneficiary.

What is the tax treatment of a lump sum payout for the participant if the insurance is paid to the plan? And what is the tax treatment if the insurance is paid to the participant and the balance paid from the Plan?

[J Simmons]

The policy was owned by the DB plan. The DB plan was the policy's death beneficiary. The DB plan is a trust exempt from payment of income taxes. I would think then that there is no income tax if the insurance is paid to the DB plan.

Those death benefits are a measure of the benefits payable to the EE's death beneficiary--that amount or, if higher, the present value of their accrued benefit. The payment, by whichever measure, is from the DB plan to the EE's death beneficiary, and thus is taxable income when so paid (unless rolled over).