DBO | Death Benefit Only

How does it work?

  1. The employer promises to pay a survivor benefit to each executive’s designated beneficiaries on his or her death.
  2. The employer purchases a life insurance policy to fund the promised benefit.
  3. The employer pays the annual premiums on the life insurance policy. These premium payments are not deductible to the business, nor are they treated as income to the executive.
  4. At the executive’s death the employer pays the survivor benefit to the executive’s designated beneficiary(ies). This benefit is treated as taxable income to the beneficiaries (I.R.D.) and may be deductible to the employer as an ordinary business expense.

Client Profile

Situation: R & D Consulting, Inc. is looking for a way to retain and reward five key employees.

Age range: 45 to 65

Compensation Range: From $100,000 and up

Retirement: At age 65

Possible Solution: A Death Benefit Only (“DBO”) plan* for each key executive funded with a life insurance policy.

In a DBO plan, an employer promises to provide a benefit to a participant’s designated beneficiary in the event of the participant’s death. The promise is unfunded for ERISA purposes in the sense that the benefit cannot be tied to a certain asset.

Typically, however, an employer will purchase a life insurance policy to provide funds when needed. The employer pays all costs of the insurance and holds the policy as part of its general assets with no interest in the policy endorsed or assigned to the employee. While the executive pays no income taxes during participation in the plan, the benefits paid from a DBO plan are fully taxable as income in respect of a decedent (I.R.D.) to the participant’s beneficiaries.

Potential Advantages:

  • Cost recovery available to employer
  • Simplified ERISA reporting if a “top hat” plan
  • Simple plan administration

Some Disadvantages:

  • No supplemental retirement income provided
  • No “golden handcuffs”
  • Death benefit paid to executive’s survivors is taxable income as I.R.D.

*A DBO plan may be treated as a “welfare benefit plan” for purposes of ERISA. Thus, absent an exemption, such an arrangement may be subject to certain ERISA requirements. A DBO plan structured as a “top-hat” plan or one that provides benefits to a small group of participants may be exempt from most of the requirements under Title I of ERISA.

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