While a large portion of the new Pension Protection Act relates to qualified plans, a very important provision related to life insurance was also included in the legislation.
The act adds new requirements that employer-owned life insurance contracts must meet for the death proceeds to be excluded from the employer’s income. If these requirements are not met, the death proceeds will be included in income to the extent they exceed the amount paid for the policy (including premiums paid).
One set of requirements is that before an employer-owned life insurance contract is issued the employer must meet certain notice and consent requirements. The insured employee must be notified in writing that the employer intends to insure the employee’s life, and the maximum face amount the employee’s life could be insured for at the time the contract is issued.
The notice must also state that the policy owner will be the beneficiary of the death proceeds of the policy. The insured must also give written consent to be the insured under the contract and consent to coverage continuing after the insured terminates employment.
Another set of requirements regards the insured’s status with the employer. The insured must have been an employee at any time during the 12-month period before his death, or at the time the contract was issued was a director or highly compensated employee. A highly compensated employee is an employee classified as highly compensated under the qualified plan rules of Code section 414(q) (except for the election regarding the top-paid group), or under the rules regarding self-insured medical expense reimbursement plans of Code section 105(h), except that the highest paid 35% instead of 25% will be considered highly compensated.