New Form for Reporting Employer-Owned Life Insurance Policies

Title:
New Form for Reporting Employer-Owned Life Insurance Policies
Publication:
From the March 2008 Riker Danzig <I>Tax and Trusts & Estates UPDATE</i>
Practice:

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:

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:

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.