What are the Federal, State and local income taxes on a lump-sum death

[jlf]

What is the Federal, State and local income tax consequence of a lump-sum death benefit from a DB governmental plan?

Thanks,

Joel L. Frank

[Carol V. Calhoun]

The basic rule is that the excess of (a) the amount received in the aggregate, by the employee and his or her beneficiaries, over (B) the amount of after-tax contributions is ordinary income. However, the mechanism is complicated. If you click on this link, you can see IRS Publication 575, which gives details. (Reading or printing this publication requires the Adobe Acrobat Reader, which is probably already installed on your computer but can be downloaded for free by clicking on the link if it is not.)

[jlf]

Let's assume the death benefit is equal to 3 X annual salary for a death benefit of $180,000.00. Is this benefit taxable?

[Carol V. Calhoun]

Hmm, this would be a most unusual death benefit to have inside of a governmental DB plan. (In the ones I have seen, the death benefit is usually equal to the accumulated employee contributions, or is a feature of a survivor benefit, but is not a multiple of earnings.) Is the benefit funded through life insurance owned by the plan? (There are special rules for that.)

[jlf]

Yes...the death benefit comes from an internally funded group life insurance plan. I am referring to the NYC Employees Retirement System. This lump-sum death benefit is in addition to a return of the participant's own contributions to the pension system. E.g. one month's salary for each full year of service up to a maximum of 3 years salary after 36 years of service. Some beneficiaries have paid income tax on this specific death benefit.

If the death benefit comes from a group life insurance plan is it not income tax free?

Best wishes,

Joel L. Frank

[jlf]

Can someone out there assist me? In NJ, for example, lump-sum death benefits are funded by group life insurance underwritten by the Prudential and paid for by the public employee pension fund and the employee. Such death benefits are not eligible for rollover treatment because they are life insurance proceeds. These amounts are in addition to a return of the participant's pension contributions.

If these lump sum death benefits, however, are not labeled "life insurance proceeds" are they eligible for rollover treatment?

Best wishes,

Joel L. Frank

[Carol V. Calhoun]

You should probably talk to the staff of the plan involved. I'm not quite sure why they would not be labeled as life insurance proceeds under the circumstances you describe.