Death Benefit Issues For Deferred Retiree

[mming]

HCE dies while still employed. She has been receiving RMDs equal to 12 times her AB every year. She has a non-spouse beneficiary. Although the document addresses how long the beneficiary can keep the benefit in the plan if the participant dies before her required beginning date, it is silent on what the time frame is if the death occurs after the RBD. This may be advantageous as it can allow the plan administrator maximum flexibility on determining the time frame, and if this is the case, perhaps it would be reasonable to allow 5 years from the date of death. I wasn't able to find much in the law addressing the maximum time permitted in such a situation and wanted to be sure that we wouldn't be running afoul of any regs - would our assumption be reasonable or does anyone know if the benefit can remain in the plan longer than 5 years?

We have also gotten widely varying opinions from actuaries regarding how the lump sum benefit should be calculated. Perhaps the most unsettling one we've been told is that since the plan's normal form is a life annuity, the benefit is deemed to have been annuitized when the RMDs began and now that the participant has died the beneficiary is not entitled to anything, as the "life annuity" benefit has ended. This would be quite disastrous because the participant has a very large benefit. Aside from defining the normal form, the document is silent on whether RMDs count as payment of a life annuity option. I would think that the participant would have to affirmatively elect to receive their benefit as a life annuity for the benefit to be considered totally paid upon death, in contrast to the RMDs being a payment over which she has no control. I am curious to see what members on this board think about this.

Lastly, assuming the beneficiary is still entitled to a distribution, I imagine that the lump sum would be the PV of the vested AB unreduced for the RMDs - is this correct? This is the first time I've had to do such a calc and am a little nervous about it, especially given the large benefit involved. All help is greatly appreciated.

[Andy the Actuary]

Retain benefits attorney to explain plan and options and actuary to make calculation. Able legal counsel should be able to refer actuary in whom Plan would feel confidence. In particular, no professional opinion rendered without reviewing the Plan document, facts and circumstances, case law, etc. is professional.

[Effen]

You are asking the right questions, but the answer is in the plan document.

What is the death benefit under the plan? Is it payable to non spousal beneficiary?

Did the plan require the participant to make an election of their form of payment at the MRD or did the plan just pay the accrued benefit with no election. My personal opinion is that no election is necessary for the payment of RMDs, however many argue that it is. Either way, your plan document should define the benefit and when it is paid.

You might need to get the actuary involved to determine the value of the death benefit, if any.