Death as Forfeiture Event?

[ERISAatty]

I'm stumped on a simple question in response to an unsual client request.

Is it permissible to design a 409A-subject agreement under which, if the benefit recipient dies, payment of (remaining) benefits is forfeited?

I'm hung up on the concept that the benefit are otherwise "vested" (which I thought meant nonforfeitable).

If both parties consent that death will result in the cancellation of all employer obligations, then it should be fine. (....right?)

Thoughts welcome. Thanks.

[Guest Subsequent Deferral]

I definitely think it is. I see a lot of agreements, where the vested right is forfeited based on certain events (i.e., cause, separation before age 55, etc). This seems a little controversial if I understand it correctly. Essentially, you are saying that at death, my vested right disappears. While, that may make sense for purposes of 409A -- it seems pretty shady.

[Chaz]

I think the cops will know where to look for the prime suspects.

[Just Me]

Vested means no longer subject to a substantial risk of forfeiture. This means that there is no longer a continued service requirement in order to receive payment (or there is no longer a contingent condition related to the purpose of the transfer that will trigger "vesting"). This is a very different concept from "vesting" (i.e., nonforfeitability) in the qualified plan world.

[Ron Snyder]

Companies frequently will fund executive deferred compensation through life insurance policies so as to obviate this situation. The participant's spouse (or beneficiary) receives a death benefit (which may be substantially less than the life insurance proceeds) and the employer receives the accumulation amount. This also allows the company to accumulate the executive's deferred compensation benefit in tax-deferred investments. MetLife, Mass Mutual and others provide GVUL (group variable universal life) policies for this purpose.

[Guest Sieve]

Whether or not deferred compensation is subject to a substantial risk of forfeiture does not take into account the possibility of loss of the right to the deferred compensation on death. It merely relates, broadly, to whether additional service is required in order to be entitled to the deferred compensation.

And, of course, we all know that a qualified plan does not violate vesting provisions of IRC Section 411 if employer-derived accrued benefits are forfeited at death (except to the extent of a survivor annuity) (IRC Section 411(a)(3)(A)).