Lorman: “New Hurdles for Employers Who Obtain New Corporate Owned Life Insurance,” 2006-10-30
The Pension Protection Act of 2006 includes new rules applicable to employers who obtain life insurance policies, also known as corporate owned life insurance (COLI) on the lives of one or more of its employees. Under the new rules, the following requirements must be satisfied if the employer desires to exclude the policy proceeds from its income upon the death of the employee.
Advisors need to be aware of these rules. Failure to satisfy the requirements will result in the policy proceeds being included in the employer’s income (except to the extent of the premiums paid by the employer). These new rules apply broadly to most corporate owned life insurance policies, including policies that are owned by and payable to the employer to fund deferred compensation payments or to fund equity redemptions at the death of the insured. The rules also apply to policies that are owned by an employer where the death benefit is payable to a designated beneficiary (although it is not clear how the rules would apply in that situation).