Might a cash-balance pension plan provide no benefit after an unmarried participant’s death?

[Peter Gulia]

In a recent BenefitsLink discussion on how to handle a situation about an absence of a participant’s beneficiary designation, Calavera alluded to some possibility that a pension plan might, if there is no surviving spouse and no participant-designated beneficiary, provide no benefit distributable after the participant’s death.

Even if it’s rare, has anyone seen a cash-balance pension plan with provisions like that?

[Paul I]

All of the cash balance plans that I have seen provided for default beneficiaries if for some reason there are no spousal benefits payable, with the estate being the ultimate default beneficiary.  Further, all of the defined benefit plans I have seen also provided for additional, non-spouse default beneficiaries.

That being said, this article published by the Pension Rights Center in November 2020

https://www.pensionrights.org/resource/understanding-survivor-benefits-in-private-retirement-plans/ comments that "Pensions are another common type of employer-sponsored retirement plan. The formal industry term for a pension plan is a Defined Benefit Plan. Survivor benefits in defined benefit pension plans are very different from survivor benefits in defined contribution plans. Spouses of participants in defined benefit plans are better protected, but defined benefit plans typically only pay survivor benefits to a spouse. If an unmarried plan participant dies but has children, those children will most likely not receive a survivor benefit."

Unfortunately, they do not list a source for this comment.  I am surprised at the use of "typically only" and "most likely" in the highlighted sentence.

I imagine any pension plan that did not pay benefits where there is no spouse and no participant-designated would say "that's what mortality tables are for".

 

[Peter Gulia]

Thank you, Paul I. Your observations relate to why I ask my question.

Because a cash-balance pension plan illustrates an accrual to look like an individual account, some participants—especially the many who never have been a participant under a defined-benefit plan that’s not a cash-balance plan—might imagine a plan must provide for some taker even if the participant has no surviving spouse. To them, a pension plan that provides nothing on an unmarried participant’s death before retirement could be a surprise.

Except for a surviving spouse’s QPSA ERISA § 205 commands, does a cash-balance plan’s designer ever consider providing no death benefit in some circumstances?

(If so, might that slightly lower the employer’s funding cost?)

Or would not providing a death benefit be so contrary to the cash-balance idea that no one does it?

[Belgarath]

The following excerpt is from a Society of Actuaries write-up from way back that I found on the internet, FWIW:

Being defined-benefit plans, cash balance plans need only to provide at death the surviving spouse benefits mandated by the Retirement Equity Act of 1984. However, in practice most plans provide more substantial death benefits equal to the full account balance payable in a lump sum or convertible into an annuity, and in this case, there would usually be no difference in the value of benefits between single and married employees, or male and female employees.

[Hojo]

Peter,

I think the main difference is in large plans vs small plans.  Large CB plans, like BOA will act like more traditional Db plans and will have the same rules upon death that, unless there is a surviving spouse, there is no benefit after death.  Almost every small CB plan is there as a tax deferral vehicle for the owner and will pay 100% of the benefit upon death.  In my opinion, it's just a matter of what world you're working in.

[Calavera]

Cash balance plans are defined benefit plans. They have to provide a QJSA to a surviving spouse. Any other provisions are optional. I personally haven't seen a cash balance plan with limitations to death benefits. I have seen "standard" defined benefit plans where death benefits were payable to the spouse only, and also where death benefits were payable only to the spouse or to the designated beneficiary.

[CuseFan]

6 hours ago, Peter Gulia said:

(If so, might that slightly lower the employer’s funding cost?)

Or would not providing a death benefit be so contrary to the cash-balance idea that no one does it?

Peter, I don't think providing/not providing a death benefit above and beyond the required QPSA would have a material impact on the plan's minimum funding requirements. I do not recall seeing a small cash balance plan limit death benefits to the statutory minimum.

I have seen one or two larger plans that provided the minimum QPSA only, mainly due to being a holdover provision from the converted traditional plan. That said, we have consulted on and performed many large plan cash balance conversions over the years and the enhanced 100% death benefit for all was a "selling point" that helped cushion what was future pension accrual slow down for older mid-career participants compared to the traditional plan formula.

Also, many of our early conversions gave participants the choice of staying under the traditional formula or converting to cash balance (fully, with a converted opening account balance). In addition to the lump sum option, providing the 100% death benefit regardless of marital status was again an important selling point.

Finally, in the small plan arena, where many a cash balance plan is designed to benefit one or more owners, I do not think single or divorced owners would view a partial or no death benefit in a favorable manner.

[acm_acm]

23 hours ago, CuseFan said:

future pension accrual slow down for older mid-career participants

Euphemism of the year.

[CuseFan]

Sometimes you just need to get creative with your words!

[Todd Flessner]

I've seen ONE client's cash balance plan provide for no pre-retirement death benefits (not even to the estate) if the participant was not married.

Rare but it's out there.