An Introduction to the Death Benefit Only Plan

A Death Benefit Only (DBO) plan (sometimes called a survivors’ income benefit plan) is an executive benefit promising payments from the employer to the survivors of an eligible employee at the employee’s death. As its name implies, a DBO plan provides only death benefits and promises no payments to the employee during his lifetime. In essence, the DBO plan is a form of deferred compensation plan, which does not provide any retirement benefit for the covered employee and defers payments until the employee dies. Payment of DBO benefits is typically conditioned upon: (a) the survival of the employee by an employer-designated beneficiary; and (b) the employee’s continued employment with the employer until the time of his death.

Although a DBO plan typically provides only pre-retirement death benefits, in the authors’ opinion it should be possible to structure a plan to provide both pre and post-retirement death benefits or to just provide postretirement death benefits to select retirees. A postretirement plan may be an attractive alternative to using an endorsement split-dollar arrangement to provide death benefits to retirees, due to the escalating Reportable Economic Benefit (REB) costs associated with split-dollar arrangements. Although the death benefit paid pursuant to a DBO plan would be income taxable, this may be preferable to the escalating income tax consequences of the REB. It should be noted, however, that a postretirement DBO plan would run a higher risk of estate inclusion of the death benefits—if the primary employer-designated beneficiary is not alive at the insured’s death, then the plan would likely pay the death benefits to the insured’s estate as a default beneficiary. 

The key goals of a DBO are to provide a significant (and often estate tax free) death benefit, generate substantial amounts of income and/or capital to an employee’s family, and help recruit, retain, and reward employees while acting as a counterbalance to the limitations upon highly compensated employees found in qualified retirement plans.

Although payments can take the form of a lump sum, in most cases, benefits will be payable in monthly installments over a fixed period of time (such as five years) or as a lifetime annuity. The death benefit can be a set, predetermined amount, a multiple of the participant’s final salary, or a multiple of the covered employee’s final average compensation (an average of the covered employee’s three final years of compensation is common).

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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