March 15, 2010
Taxation Alerts

IRS Guidance on Employer-Owned Life Insurance ("EOLI") Reporting Rules
by Agnieszka K. Adams

IRC § 101(j) generally provides that an employer can only exclude from his gross income an amount equal to the sum of the premiums paid upon the receipt of insurance proceeds due to the death of an employee.  This rule applies to life insurance contracts issued after August 17, 2006.  IRC § 101(j)(2) provides an exception to this general rule.  Under this section, the employer can exclude all of the proceeds if certain notice and consent procedures are satisfied and if, at the time the contract was issued, the insured was either an employee at any time during the 12-month period before the insured's death, a director or a highly compensated individual.  To satisfy the notice requirements before the issuance of the policy the employer must notify the employee in writing, obtain written consent and inform the employee in writing that the company will be a beneficiary of the proceeds.  The law is far reaching and the notice and consent requirements have to be satisfied even if the insured is an owner-employee of a wholly-owned corporation.  In addition, although it is possible to correct an inadvertent failure to satisfy the notice and consent requirements, it is only possible if it 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 EOLI was issued. 
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