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IRS Answers EOLI Questions

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A grantor trust may be able to be the owner of an employer-owned life insurance contract, but a qualified plan that is supported by a trade or business cannot.

Officials at the Internal Revenue Service discuss this and other topics concerning employer-owned life insurance, which is also known as corporate-owned life insurance, in IRS Notice 2009-48. The principal author is Linda Boyd.

Boyd and other IRS officials provide guidance concerning sections 101(j) and 6039I of the Internal Revenue Code, which were added to the code by the Pension Protection Act of 2006.

Section 101(j) sets the rules that an employer must follow when excluding EOLI payments from taxable income. Section 6039I sets EOLI policyholder reporting requirements.

The first of the 17 questions answered deals with the nature of persons that can own an EOLI contract. The owner of an EOLI contract must be a person engaged in a trade or business. A “related person,” such as a qualified retirement plan sponsored by the employer, cannot be the owner of an EOLI contract, and any life insurance contract that it does own cannot be an EOLI contract, IRS officials write.

“A contract, however, that is owned by a grantor trust (such as a rabbi trust), assets of which are treated as assets of a grantor that is engaged in a trade or business, is an employer-owned life insurance contract if the contract is otherwise described in Section 101(j)(3),” officials write.

A contract also can be an EOLI contract if it is subject to a split-dollar arrangement, or if it is owned by a partnership or sole proprietorship that is engaged in a trade or business, officials write.

Other answers deal with topics such as when an EOLI contract is considered “issued,” what types of individuals can be classified as “employees,” and how quickly an EOLI holder must invest death benefits in itself in order to exclude the benefits from taxable income.

A copy of the notice is available here.


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