Following NAMFISA’s insistence that trustees may not abdicate their responsibility to third parties, such as insurance companies, and that fund rules, therefore, cannot refer to their underwriting policy for risk exclusions and limitations, many funds are moving their death benefits out of the fund to an employer-owned policy.
Any benefit arising under an employer-owned life policy is due to the employer, even if the insurer would pay it directly to a beneficiary per the employer’s instruction. While the distribution seems simpler and quicker than the section 37C process trustees must follow, it entails various important differences.
Firstly, persons dependent on the deceased employee may not receive any benefit as the employer does not carry the fiduciary duty of trustees under section 37C. Secondly, any benefit paid to a beneficiary does not enjoy the protection of sections 37A and B. A beneficiary may never enjoy the benefit because of a default judgment against him. The employer would also be entitled to deduct any amount the deceased employee owed. Thirdly, the benefit will not enjoy the beneficial tax treatment a retirement fund benefit would.
The tax treatment of a policy pay-out could be pretty tricky from the employer’s and employee’s perspective and would depend on the contract between the employer and employee. The proceeds on an employer-owned policy could become taxable for the employer or the beneficiary.
The amendment of the Income Tax Act by Act 15 of 2011, stopped the practice of insurance companies paying out death benefits on employer-owned policies directly to beneficiaries, tax-free (read ‘Employer-owned life policies and the Income Tax Act’ under ‘Legal Snippets’). Now, employers must ensure that they treat death benefits correctly for tax purposes and should consult a tax expert. The tax expert should review the employer’s standard employment contract to ensure it provides the most beneficial tax arrangement.
The legal framework for paying a death benefit under an employer-owned policy differs significantly from a retirement paying a death benefit under the Pension Funds Act, section 37C. In the former case, labour law, the employment contract and the Income Tax Act relating to employment constitute the legal framework. In the latter case, the Pension Funds Act and the Income Tax Act relating to pension fund benefits form the legal framework. Beneficiaries and prospective beneficiaries enjoy different rights under each arrangement.
I suggest that it is inappropriate to task pension fund trustees with distributing the death benefit under the employer’s policy in the same way they will distribute the pension fund death benefit under section 37C. The employer could end up short-changed and might not even have recourse to his insurer because the board of trustees serves a different legal entity and is not an extension of the employer. The employer may establish a committee comprising the same persons to deal with the death benefit under its policy. The committee acts in a different capacity under different rules. The rules applying to the benefit under the employer’s policy are less stringent than those under the Pension Funds Act.
The employer committee must consider the employment contract and precedent set in previous cases. It can distribute the death benefit much sooner than the trustees would generally be able to. When considering how to distribute a death benefit from the pension fund, trustees must take cognisance of the death benefit distribution under the employer’s employment contracts.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.