Most of us probably do not give any thought to death-in-service benefits, but we ought to.
Death-in-service benefits are almost always insured and are usually an inexpensive benefit to provide. No employer wants an employee to die in service without a death benefit being paid. Have you checked with your broker that your workforce is on cover on joining service?
Sometimes eligibility for these benefits depends on whether the employee has joined the company's pension scheme. This may happen immediately when an employee joins service. However, frequently there may be a waiting period in which case the employee is not covered for death-in-service benefits until the waiting period has expired. Best practice is to ensure that all employees are covered for death-in-service benefits on joining. Additional cover can be provided when an employee joins the pension scheme.
Where you provide a death benefit, make sure your workforce knows about it. If you operate a pension scheme, the death benefits are likely to be arranged in conjunction with the retirement provision and both will need to be communicated to members via the members' explanatory booklet.
Your employees should be encouraged to send the scheme trustees a nomination form or 'wishes letter' setting out to whom they would like their death-in-service benefit to be paid and in what shares and proportions. Pro forma wishes letters usually are included in well-drafted explanatory booklets.
While wishes letters are not usually binding on the trustees, they are likely to influence them when paying the benefits. You should consider working with the trustees to remind staff to update their wishes letter from time to time.
In the event of an employee's death, you may need to assist the trustees in establishing the circumstances of all potential beneficiaries. You may have a better understanding of the deceased's circumstances and be better placed to make discreet enquiries than the trustees. You may need to collaborate with the trustees with as much detail as possible in relation to the individual concerned. This will enable the trustees to make an informed decision as regards to whom the death-in-service benefit should be paid and in what shares and proportions.
What Should Employees Do?
Employees should complete a wishes letter to let the trustees know to whom they would like their death-in-service benefits to be paid. Employees should ensure their wishes letters are clear and understandable. They should regularly review them and update them if their circumstances change.
They should be aware that Revenue limits apply to the payment of lump sums under a scheme. Cover in excess of Revenue limits may be applied in the form of pensions for the member's dependants.
Employees should also bear inheritance tax in mind when suggesting to the trustees to whom the death-in-service should be paid. Death-in-service benefits are treated as coming from the deceased for capital acquisitions tax (CAT) purposes. There is no CAT on inheritances between spouses. Payments to others might be taxable depending on their relationship to the deceased and the values involved.
Role of Trustees
Trustees should check that their scheme documentation is clear and unambiguous and is capable of being implemented. Old documentation might be unnecessarily cumbersome. They should check whether theirs needs to be consolidated and updated. Trustees should also ensure that they are satisfied that the members' explanatory booklet reflects what is set out in the rules.
Trustees should work with the employer to obtain wishes letters from all employees. Employees should be asked to update these from time to time, if required. Wishes letters are usually submitted in a sealed envelope, which the trustees do not open until the employee's death. This is to protect the employee's privacy.
Employers usually know more about employees than trustees do. This means that where an employee dies in service, trustees should be in close contact with the employer with a view to getting an accurate picture of the deceased's position in life at the time of his death. For example, this might prevent the trustees from paying a lump sum and the spouse's pension to a person who is not the deceased's spouse.
It is essential that trustees follow proper procedures before paying benefits out. Most insurance companies will not pay death-in-service benefits until they receive a death certificate. Where there is likely to be a delay in issuing a death certificate, trustees should check with the insurer as to whether it is possible to pay the monies out on foot of a coroner's certificate, if there is one. This is particularly relevant where delays in paying out will result in hardship to the beneficiaries.
Trustees should also bear tax issues in mind. Although the receipt of a death benefit may be within the charge to CAT, trustees are secondarily accountable for the payment of any CAT arising. They can be held to account for it if the beneficiary fails to pay it to the Revenue Commissioners. Consequently, depending on the circumstances, it may be appropriate for trustees keep back a part of the payment pending receipt of a certificate of exemption from the Revenue or evidence of payment of tax.