Nongovernmental 457(b) Death Benefit Taxation

[Rob P]

A participant in a nongovernmental 457(b) plan passed away. In accordance with the plan document the beneficiary (the spouse) elected to receive the benefit in the form of a single lump sum distribution.

I'm hoping that I can get input on the following questions:

1. It is my understanding that the distribution must be reported on a 1099-MISC form. Does this get reported in Box 3 as "Other Income" or Box 7 as "Nonemployee Compensation"?

2. Is the distribution subject to SS and Medicare taxation? If so, does the employer pay their portion, or does the beneficiary need to pick up both the EE and ER portion under "self employment income" (1040-SE)?

Any help would be appreciated.

[QDROphile]

Have you determined that FICA taxes were not paid as the benefit accrued? I suspect that most 457(b) plan designs call for FICA taxes to be paid as account balances accrue. Compliance is another matter.

[Rob P]

Please assume that there was a cliff vesting schedule, only "employer" contributions and this is a nonfunded plan. I'm assuming that FICA/FUTA are only reportable when the benefits become available and nonforfeitable. The benefit becomes fully vested upon death. It is my understanding that the "accrued" contributions only become subject to taxation when they become available to the participant (or in this case the beneficiary).

I'm new to 457 plans, sorry if I was unclear.