EOLI Critical Actions to Preserve Income Tax Free Death Benefit Proceeds
Posted on June 23, 2010 in Advanced Planning
Historically, life insurance death benefit proceeds have received income tax free treatment for any beneficiary, including policies owned by employers. Employers and employees enter into contractual arrangements often funded with life insurance, and they rely on the tax free proceeds treatment to carry out the obligations under those arrangements.
Such arrangements between employers and employees may include:
- Policies funding stock redemption plans
- Key person life insurance on company owners or employees
- Informal funding arrangements for Non-Qualified Plans, such as:
- Deferred Compensation Plans
- Supplemental Executive Retirement Plans
- Death Benefit Only Plans
- Certain other benefit arrangements such as endorsement split dollar plans
IRS Action and Resulting Required Compliance
The Pension Protection Act of 2006 introduced new tax law, IRC Section 101(j), and the companion reporting provisions under IRC Section 6039I that turns the potential taxation of death benefit proceeds upside down.
Effective for all EOLI policies issued, or existing policies that were subject to a “material change”, after August 17, 2006 the death benefit proceeds payable to an employer are taxable as ordinary income unless certain actions were taken. In addition, the IRS requires employers to annually report such EOLI policies beginning with tax years ending after November 13, 2007 on Form 8925 which is filed with the year end business tax return.
Employers that are Subject to this Law
Employers of all types and sizes are subject to this new law, including sole proprietorships (with the exception of a sole proprietor who owns insurance on him/herself).
CBIZ Special Risk Can Help
If your company benefits from Employer Owned Life Insurance policy proceeds, we invite you to contact us to assist you in determining compliance with the new law. You will receive a complimentary policy review to assure the policies continue to meet your business objectives and are competitive in the current marketplace.
Internal Revenue Service Circular 230 require us to advise you that the tax advice, if any, contained in this e-mail is not intended or written to be used by you, and cannot be used by you for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.