Posted by Bob Burton on Mon, Jun 8, 2009 @ 02:16 PM

Employer Owned Life Insurance

Employer Owned Life Insurance

The Pension Protection Act of 2006 (PPA) covered many subjects, but perhaps one of the most important dealt with “COLI Best Practices”. COLI of course stands for Corporate Owned Life Insurance, but a more generic and informative reference would be to EOLI, or Employer Owned Life Insurance. The basic rule under the PPA, which added Section 101(j) to the Internal Revenue Code, applicable to policies issued after August 17, 2006, is that the proceeds of EOLI are taxable income to the extent they exceed premiums paid; fortunately, however, there are exceptions to this basic rule that apply to the types of transactions which you, our advisors, typically handle for your clients, specifically, policies insuring the business owners themselves and/or their key employees. However, in order to activate these exceptions and keep the life insurance proceeds income tax-free, the principal new requirement is that the insured’s consent must be obtained in writing before any application is taken. In addition, pursuant to IRC Section 60391, a simple informational tax form, Form 8925, must be filed annually with the employer’s federal tax return as long as any such policies remain in force.

Coincidentally, the IRS recently released Notice 2009-48 (the Notice) which provided guidance as to several aspects of the new requirements. Most matters covered in the Notice are straightforward and do not contain any surprises. However, applicable to those situations where post August 17, 2006, policies may have been put in force without complying with these new requirements, a very brief window has been provided for correcting this deficiency. In essence, the Notice states that the IRS will not challenge a taxpayer who made a good faith effort to comply with the new requirements by June 15, 2009, exactly one week from today.

Just about every carrier has its own suggested form for obtaining the insured’s consent, offered as a supplement to its basic application package, but Provada has also developed a form that we can supply upon request.

Please contact us at 415-369-9990, ext 116, or bob@provada.com, for more information.