Dear HORAN Advisors:
This is a reminder that employer-owned life insurance contracts, more commonly referred to as corporate-owned life insurance or COLI, are subject to notice and consent requirements (as well as other requirements) and annual filing requirements with the Internal Revenue Service. If the notice and consent requirements are not satisfied before an employer-owned life insurance contract is first issued, any death proceeds paid under the contract generally are not excludible under Revenue Code section 101(a). Because the consequences of noncompliance are so harsh (i.e., taxable death benefits), it is generally advisable to comply with these requirements (as well as others) whenever there is a reasonable possibility that an arrangement may constitute an employer-owned life insurance contract. In addition, the annual filing requirements are satisfied by attaching an IRS Form 8925 to the policyholder's income tax return for each tax year during which the policyholder has employer-owned life insurance contracts in force.
Notice and Consent Requirements
The notice and consent requirements are satisfied only if, before the issuance of the policy, the employee:
- is notified in writing that the applicable policyholder intends to insure the employee's life and of the maximum face amount for which the employee could be insured at the time the contract was issued;
- provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment; and
- is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee.
Although the statute does not authorize the correction of inadvertent notice and consent failures, in Notice 2009-48 the IRS indicated that it would not challenge an inadvertent failure to satisfy the notice and consent requirement if the following conditions are met:
- the applicable policyholder made a good faith effort to satisfy those requirements, such as by maintaining a formal system for providing notice and securing consents from new employees;
- the failure to satisfy the requirement was inadvertent; and
- the failure to obtain the requisite notice and consent was discovered and corrected no later than the due date of the tax return for the taxable year of the applicable policyholder in which the employer-owned life insurance contract was issued.
However, an inadvertent notice and consent failure cannot be corrected after the insured employee has died. Therefore, policyholders should develop policies and procedures to ensure compliance and should periodically review their operations in order to be able to correct any such inadvertent failures within the applicable time limits.
Annual Filing Requirements - IRS Form 8925
Section 6039I and IRS Form 8925 require that every applicable policyholder owning one or more employer-owned life insurance contracts issued after August 17, 2006 (or issued before then, but materially changed thereafter), provide the following information showing for each year the contracts are owned:
- the number of employees of the applicable policyholder at the end of the year;
- the number of such employees insured under such contracts;
- the total amount of insurance in force at the end of the year under such contracts;
- the name, address, and identifying number of the applicable policyholder and the type of business in which the policyholder is engaged; and
- a statement that the applicable policyholder has a valid consent for each insured employee or, if all such consents are not obtained, the number of employees for whom such consent was not obtained.
HORAN is a member of AALU: The Association for Advanced Life Underwriting, who provided information for this update.
Terence L. Horan, CLU, ChFC
President & CEO