Employer-owned Life Insurance After the Pension Protection Act of 2006

Employers often buy life insurance for their employees, but there have been some cases of abuse. Congress added a new law, 101(j), to stop these abuses. This law has extra requirements for employers, and if they’re not followed, the money from the life insurance could be taxed. In the 1980s and 1990s, some companies started buying life insurance policies for all of their employees, even low-level workers like janitors. They would borrow money against the policies to pay the premiums and get tax breaks. The government tried to stop this by making it harder to get tax breaks for these policies, but some companies kept doing it. One big company, Winn-Dixie, got in trouble for doing this and had to pay the taxes they owed. After a former NFL player testified before Congress about an employer’s EOLI policy that paid out a large sum after the death of a low-level employee, Congress passed a law to make sure that excess death benefits from these policies are taxed unless certain notice and consent requirements are met. The law includes exceptions for certain high-ranking employees or officers. The second class of exception for employer-owned life insurance (EOLI) applies to certain amounts paid to the insured’s family or designated beneficiary, trust, or estate, or used to purchase an equity interest from the insured’s heirs. The law requires the employee to be notified and give written consent before the EOLI policy is issued. Starting in 2006, new rules were put in place for employer-owned life insurance policies. These rules require employers to report information about the policies they own, such as the number of employees insured and the total amount of insurance coverage. This reporting is required each year on IRS Form 8925. These rules were put in place to regulate this type of insurance and ensure transparency. If an employer buys a life insurance policy on their employees, they need to get permission from the employees first. This rule is meant to protect regular employees who may not know about or agree to the policy. This rule mainly applies to higher-up employees who probably already know about and agree to the policy. But some employers may not have known about this rule and didn’t get permission from employees, so they may need to cancel the policy and get new permission, or transfer the policy to follow the rules. If a company has a buy-sell agreement, they may use an EOLI policy to fund the obligation to buy the shares of a deceased employee. The rules on this can get complicated, especially if the policy is owned by a related person to the company. There are also requirements for notifying the employee about the maximum amount of insurance they can have, which can impact the amount paid out under the policy. The I.R.C. §101(j) is a tax law meant to stop companies from using life insurance policies on their employees for tax benefits. For most uses of these policies, employers won’t be taxed on the money they get when an employee dies, as long as they follow some rules. Tax advisors need to make sure their clients know about the rules and help them if they didn’t follow them when they bought the policies. This law was made because some companies were making money when their employees died, and it wasn’t fair. This excerpt discusses the Pension Protection Act of 2006 and its impact on life insurance policies. It also mentions specific sections of the Internal Revenue Code and related regulations.

Source: https://www.floridabar.org/the-florida-bar-journal/employer-owned-life-insurance-after-the-pension-protection-act-of-2006/