Paul's somber request for the Lord's mercy (as opposed to 'blessings' which are needed by the living) for Onesiphorus, and the use of the past tense when referring to his actions, all suggested to the early Church Fathers that Onesiphorus had died, perhaps a martyr.
This is a difficult passage to interpret. Paul seems to be referring to mortifications and penitential labors were undergone for the dead in the hope of their resurrection unto glory. That is, the term "baptism" is used metaphorically for difficult trials (similar use of metaphor : Mark 10:38-39; Luke 3:16; Luke 12:50). This would be consistent with the language in the subsequent 1 Cr 15:30.
Why would the dead need grace (in context: "aid," such as prayers, alms) unless they would somehow benefit from it? In hell they are beyond grace. In heaven they have abundant grace. The context impels the living to aid the deceased.