Millions of Life Insurance Policies Are Owned by Companies – How Many Will Be Fully Taxed as Income?
The Pension Protection act of 2006 features new rules on business owned life insurance that have been incorporated into the provisions of Sections 101(j) and 60391 of the Internal Revenue Code.
Following are the specific requirements under the Section:
- Notice – The employee must receive written notice of the policy death benefit and stating the employer will be the beneficiary of the policy death benefit.
- Consent – The employee must provide written consent to being insured even after he/she terminates employment.
- Form 8925 – MUST be filed each year with the business owner’s tax forms.
Both the Notice and Consent must be met before the policy is issued and the filing of Form 8925 must be done with the business owner’s annual taxes each and every year. All three of the above steps are required in order for the employer to receive death benefit proceeds income tax free.
Unless these policies meet all three provisions noted above, the death benefit proceeds on such a policy will be included in the employer’s income tax.
One way to fix this problem is to replace your business owned life insurance with a new policy and follow the above guidelines moving forward. Call us for help and referral to qualified experts. This article will be updated shortly with additional information from tax expert Tom Maguire of Hebets and Maguire, I had a conversation with Tom about this and he had some information on remedial filings that I will share as well. My thanks to Rocky Mountain Insurance Network for sharing key information used in this important reminder.CIRCULAR 230 NOTICE: To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used, by any person for the purpose of (1) avoiding penalties under the U.S. Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed in this article. Always consult with a qualfied CPA on any tax issue.