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TAX ALERT:
Immediate Action May Be Required
re: Employer-Owned Life Insurance

Employers owning life insurance policies on employees which were issued after August 17, 2006 must include a new IRS Form 8925 with their income tax returns. Form 8925 is required to be included with tax returns annually for years ending after November 13, 2007 and is an annual requirement per the Pension Protection Act (PPA) of 2006.

If your company has employer owned life insurance, contact your Anchin relationship partner to determine what information must be included with your company’s tax return.  You should also contact your life insurance agent to make sure all notice requirements documenting coverage have been met for policies issued after August 17, 2006 or those that were in existence prior to that date but materially modified subsequent to that date.

The inclusion of Form 8925 will be the tax return preparers’ responsibility based on information submitted by you.  The responsibility for the notice and record keeping requirements should rest with the insurance carrier or life insurance agent.  Some insurance carriers, generally the larger insurance firms, are including this form in their enrollment packets, while some are not.  The rules require the notice requirement to be met before the insurance is in place.

An employer owned life insurance policy is a policy that:

• Is owned by an employer in which the employer is a direct or indirect beneficiary; and
• Covers the life of an employee as of the date the policy is issued.

Common examples of employer owned life insurance policies would include:

• “Janitor life” where large corporations buy policies in massive numbers on the lives of rank and file employees;
• Key man life insurance;
• Insurance to fund certain non qualified deferred compensation plans; and
• Insurance to fund buy/sell agreements which are “redemption” agreements (as opposed to cross purchase agreements where the insurance is outside of the company)

In general, the receipt of death benefits from a life insurance policy is income tax free to the beneficiary/recipient.  There are exceptions to this rule when a policy is sold or transferred.

The Pension Protection Act of 2006 brought changes to this area of the tax law for employer owned life insurance policies.  Under new rules, the proceeds from an employer owned life insurance policy will only be excluded from taxable income to the extent of premiums paid on the policy and certain other payments for the contract.

An important exception to this income inclusion rule exists if certain notice and consent requirements are met and one of the following applies:

• Insured was an employee at any time during the period 12 months before death;
• At the time the contract was issued, the insured was a highly compensated individual;
• The proceeds are paid to the insured individual’s family or a trust for the benefit thereof; or
• The insurance proceeds are used to purchase an interest in the employer.

If this exception applies, the entire amount of the proceeds will be excludible from income as was the case prior to these rule changes.

Again, if your company has employer owned life insurance, contact your Anchin relationship partner to discuss the affects of this rule on your company’s tax return.