Chapter 44
DEATH BENEFIT ONLY (DBO) PLAN
LEARNING OBJECTIVES:
A. Understand death benefit only plans
REVIEW:
This chapter begins with a general discussion of death benefit only (DBO) plans,
and the ways in which they can be used. Following this, advantages and
disadvantages are discussed, focusing on estate and income tax aspects of
DBOs. A brief discussion of design features precedes the section on tax
implications, focusing on inclusion of death benefits in the insured-employee’s
estate. ERISA requirements are covered, with a discussion on whether a DBO is
a pension plan or a welfare benefit plan. Several alternatives are discussed along
with some information on plan installation. After two references for learning more,
the chapter ends with a question and answer section, and an extensive endnotes
section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features
Tax Implications
ERISA Requirements
Alternatives
How To Install A Plan
Where Can I Find Out More About It?
Questions And Answers
Chapter Endnotes
1
Chapter 44
FEATURED TOPICS:
Death benefit only (DBO) plans
CFP® CERTIFICATION EXAMINATION TOPIC: NONE
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Understand death benefit only plans
KEY WORDS:
Death benefit only (DBO) plan
Fixed dollar amount
Average compensation over a period of years
Lifetime benefits
Voluntary DBO
DISCUSSION:
1. Discuss ways in which a DBO plan may be used, and how it may
substitute for other benefit plans.
2. Discuss ERISA implications of DBOs.
QUESTIONS:
1. Which of the following are recommended methods of setting up a DBO
benefit formula?
(1) benefits loosely related to insurance policy death benefits
(2) benefits provided on a fixed dollar amount
(3) benefits based on average compensation over a period of years
(4) benefits tied directly, dollar for dollar, to a life insurance policy
a. (1) only
Chapter 44
b. (1) and (2) only
c. (1) (2) and (3) only
d. (2) (3) and (4) only
Chapter 44, p. 338
2. Which of the following must be true in order for the DBO death benefit to not
be included in the deceased employee’s estate?
(1) the plan does not provide any benefits payable during the employee’s
lifetime
(2) partial benefits must be paid to the corporation
(3) the employee cannot change the beneficiary after plan establishment
(4) the employee executes a temporary collateral assignment of the policy
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 44, p.338
3. What will be the likely outcome if a plan is unfunded and limited to a “top hat”
group?
a. if it is considered a pension plan, will not be subject to any ERISA
reporting and disclosure requirements
b. if it is considered a welfare benefit plan, plan documents will not have to
be submitted for DOL review upon request
c. the DOL will invalidate the plan
d. the plan should be exempt from most ERISA provisions
Chapter 44, pp. 338, 339
4. Which one of the following mistakes may cause an employer death benefit to
be included in the employee’s estate?
a. the employee has no right to change the beneficiary
b. the employee is a controlling (more than 50% shareholder) individual
c. the death benefit is not tied to the employee’s promise to continue
working for the employer
d. the beneficiary is not a revocable trust established by the employee
Chapter 44, p. 340
Chapter 44
ANSWERS:
1. c
2. a
3. d
4. b