Employer-owned life insurance policies are frequently purchased by employers to finance the future buyout of a deceased partner or shareholder, fund employee deferred compensation payments due at or after death, and/or to protect the employer’s business from loss of value due to the death of a key employee. An employer-owned life insurance policy is a life insurance policy (i) owned by the employer and under which the employer is directly or indirectly a beneficiary, and (ii) covers the life of an employee who is employed by the employer on the date the policy is issued. Generally, the proceeds from an employer-owned life insurance policy are excluded from the employer’s gross income. However, the Pension Protection Act of 2006, P.L. 109-280, added provisions to the Code that generally limit the amount excluded from the employer’s gross income to the premiums and other amounts paid by the employer to acquire the policy. See New Hurdles for Employers Who Obtain New Corporate Owned Life Insurance, September 2006 Update. If the employer complies with certain notice and consent requirements, however, proceeds from an employer-owned life insurance policy received by the employer upon the death of certain employees, directors and highly compensated individuals are excluded from the employer’s gross income. Similarly, proceeds that are paid to the employee’s family, a beneficiary designated by the employee, or the employee’s estate are excluded from the employer’s gross income provided the notice and consent requirements are met. Accordingly, the recently required notice and consent requirements must be followed to ensure that employer-owned policy death benefits are received by the employer income-tax free (subject to AMT in certain cases). The notice and consent requirements that must be met are:
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The employer must notify the employee that it intends to insure the employee’s life, and must notify the employee of the maximum face amount for which the employee could be insured at the time the policy was issued
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The employee must provide written consent to being insured under the policy, and must consent to have the coverage continued after the insured’s employment is terminated
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The employee must receive written notice that the employer will be a beneficiary of any proceeds payable upon the death of the employee
In addition to the notice and consent requirements, the Pension Protection Act of 2006 added a provision to the Code that requires an employer owning one or more employer-owned life insurance policies issued after August 17, 2006, to file a return showing, for each year the employer-owned life insurance policies were owned:
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the number of employees of the policyholder at the end of the year
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the number of employees insured under an employer-owned life insurance contract at the end of the year
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the total amount of insurance in force at the end of the year associated with employer-owned life insurance contracts
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the name, address, and taxpayer identification number of the policyholder and the type of business in which the policyholder is engaged
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that the policyholder has a valid consent for each insured employee (or, if the policyholder has not obtained a valid consent from all the insured employees, the number of insured employees for whom a valid consent was not obtained)
Under temporary regulations issued in late 2007, the IRS indicated that it might prescribe a form for employers to use to provide the required information. In early 2008, the IRS issued Form 8925, which tracks the language from the Pension Protection Act of 2006. Accordingly, any employer who owns an employer-owned life insurance policy that was issued after August 17, 2006 (with limited exceptions), must file a Form 8925 for any tax year ending after November 13, 2007. A copy of Form 8925 can be obtained at the following website: http://www.irs.gov/pub/irs-pdf/f8925.pdf Please let us know if you would like our assistance in reviewing your employer-owned insurance program, and identifying whether and how to comply with these new reporting requirements.
