What Happens to an Employee’s Interest If an Employer Goes Bankrupt?

What Happens to an Employee’s Interest If an Employer Goes Bankrupt?

When discussing an employee’s interest, both the covered employee and his beneficiaries have only the status of an unsecured creditor. A living employee typically has no rights under a DBO plan, since there are no obligations that become fixed until and unless the employee dies while working for the employer. Beneficiaries, as unsecured creditors, have no priority claim to any employer assets, including life insurance used by the employer to finance potential obligations. The likelihood…

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Why Shouldn’t Employers Make Death Benefit Only Payments Voluntarily to Avoid Estate Tax?

Why Shouldn’t Employers Make Death Benefit Only Payments Voluntarily to Avoid Estate Tax?

It is true that if the death benefit payments are not made under a contract or plan and are completely voluntary on the employer’s part, there should be no inclusion in the covered employee’s estate for federal estate tax purposes. Such voluntary payments are not includable in the employee’s estate, because neither the employee nor the employee’s beneficiary ever possessed the right to compel the employer to pay the benefit and the employee made no…

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ERISA Implications of a Death Benefit Only Plan

ERISA Implications of a Death Benefit Only Plan

A DBO plan is considered to be an employee welfare benefit plan subject to the requirements of Title I of ERISA. Fortunately, most DBO plans are exempt from ERISA’s participation, vesting, and funding requirements. Reporting and disclosure is streamlined if the DBO plan is limited to a select group of management or highly compensated employees (generally, less than 5 percent of total employees should be participants). So, in most cases, no annual ERISA filings need…

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Tax Implications of a Death Benefit Only Plan

Tax Implications of a Death Benefit Only Plan

This article provides a behind-the-scenes look at tax implications that should be considered about using a death benefit only plan instead of a traditional insurance policy. Understanding the various taxes will help you make a more educated financial decision. No income tax is payable by the covered employee on the premiums that the employer pays for key-person insurance, which is used to finance the employer’s obligation under a DBO plan. To obtain this result, the…

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Using Life Insurance to Finance a Death Benefit Only Plan

Using Life Insurance to Finance a Death Benefit Only Plan

Most DBO plans promise to make payments over a number of years (e.g., $100,000 per year for ten years, if death occurs prior to age sixty-five). Assume a plan promised a $10,000 annual death benefit for ten years to the surviving spouse of a key executive, otherwise to the executive’s children. Assume the employer corporation is expected to be in a 40 percent (or higher) combined state and federal income tax bracket at the time…

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Requirements of Using a Death Benefit Only Plan

Requirements of Using a Death Benefit Only Plan

The employer installs a nonvoluntary DBO plan by a written contract between the employer and the selected employee stating the terms of the contract. The employee should have no choice with respect to whether to elect coverage. The agreement should specify: the amount of the benefit, or the formula upon which the benefit is based; the employee (or employees) covered by the plan; the class of beneficiaries entitled to the benefit; the terms upon which…

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Disadvantages of a Death Benefit Only Plan

Disadvantages of a Death Benefit Only Plan

This article provides a behind-the-scenes look at the disadvantages and what you should know before using a death benefit only plan instead of a traditional insurance policy. Understanding the various benefits will help you make a more educated financial decision. The entire payment by the corporation to the beneficiary under a DBO plan is subject to ordinary income tax. No deduction is allowed to the employer until the benefit is paid, and the beneficiary must…

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6 Advantages of a Death Benefit Only Plan

6 Advantages of a Death Benefit Only Plan

This article provides a behind-the-scenes look at 6 advantages and why you should think about using a death benefit only plan instead of a traditional insurance policy. Understanding the various benefits will help you make a more educated financial decision. Under current law, if the covered employee is a shareholder who owns 50 percent or less of the stock of the corporation, payments under the DBO plan will be excludable from the covered employee’s gross…

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11 Reasons to use a Death Benefit Only Plan

11 Reasons to use a Death Benefit Only Plan

This article provides a behind-the-scenes look at 11 reasons why you should think about using a death benefit only plan instead of a traditional insurance policy. Understanding the various circumstances will help you make a more educated financial decision. When the employer client seeks an employee benefit to recruit, retain, reward, and counterbalance the limitations upon key employees found in qualified retirement plans. When the employer client wants an employee benefit that is simple, cost-effective,…

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An Introduction to the Death Benefit Only Plan

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…

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