Payments at Death

Most plans will provide for payment of vested amounts and of unpaid installment amounts at the death of a plan participant. How would such payments be taxed to the beneficiary?

Beneficiaries will be responsible for income taxes on the full amount received. The company is not required to withhold the income taxes. For estate planning purposes, the income would probably qualify as “income in respect of a decedent” (see IRS rules).

If FICA taxes had already been paid by the plan participant, beneficiaries would not be responsible for any additional amount.

If payroll taxes had not been paid by the participant and the payment was made in the calendar year of the employee’s death, the FICA tax would be due. However, if the payment was made in the following calendar year the amount would not be subject to FICA tax.