Advisors Blog

Employer Owned Life Insurance (EOLI) Reporting Requirements and Pitfalls
by Gregg Kaufman, CLU, CFP

How many of your business clients, CFOs and CPAs understand the tax implications of owning life insurance on their key-employees?  Traditionally life policy proceeds have been tauted as being tax-free when received by a corporate owner.  But now Employer-Owned Life Insurance (EOLI) is subject to additional tax rules enacted in 2006 to curb what were seen as abuses of so-called “janitor insurance” or the purchasing of company-owned life policies on rank and file employees without their knowledge. Whereas Corporate Owned Life Insurance (COLI) is still commonly purchased on key executives and C-Suite officers, it may be inadvisable to place life coverage on non-key employees or rank and file workers since the enacting of the Pension Protection Act of 2006. These rules require employers make certain disclosures when purchasing policies on their employees to avoid the death benefit proceeds from being fully taxable. They must first disclose the purchase to their employee and get written consent from that employee to allow a corporate beneficiary.  And they must file certain tax documents disclosing to the IRS that they own coverage on their employees.  This set of rules under IRC 101(j) is designed for policies where company is a sole or partial beneficiary to life proceeds, and could include many planning arrangements such as key-person, buy-sell, some split-dollar and others. (It is not designed to apply to pure employee benefits where employees name personal beneficiaries.)

The Opportunity

We suggest that producers and advisors let their business clients know that their life policy proceeds could be TAXABLE if these rules are not followed.  If policies were put in place after 2006 and not filed properly, there is a danger the death proceeds could become fully taxable. Companies should be filing IRS form 8925 annually which is used to report a number of facts relating to company-owned coverage. In extreme cases of non-compliance it may be advisable to re-write coverage on key executives to correct the initial disclosure errors.

For a more thorough and technical discussion of IRC 101(j) and related rules for employers, please see the attached summary provided by John Hancock. Please contact us for help in reviewing any policies in question.