A s an advisor, you should pay careful attention to Employer-Owned Life Insurance (EOLI), since new rules can make a significant difference to your clients.
EOLI contracts issued after Aug. 17, 2006 require that certain items be put into place to receive favorable tax treatment. They include:
- The employer must receive a notice of insurance.
- The employer must consent to the coverage.
- The legislation also mandates annual reporting of employer-owned contracts for each year the contract is owned.
- The report to the IRS is accomplished with Form 8925 and is attached to the policyholder’s federal tax return.
- The employee understands that the employer will be a direct or indirect beneficiary of the death proceeds.
- The notice and consent requirements should be fulfilled prior to issuing the policy.
- Form 8925 requires the following:
- The number of employees at the end of the year.
- The number of employees insured under the contract.
- The total amount of insurance in force under such contract.
- The name, address, taxpayer ID number of the policyholder- and type of business.
- An attestation that valid consent has been obtained for each insured.
If these prescribed steps are taken, the death benefit proceeds can be received income tax free.
It’s extremely important to maintain the documents and show that the client has met the notice and consent requirements in a timely manner. It is advisable that employers consult an attorney to develop suitable forms. Yet there are occasions when the paperwork may not have been taken care of properly.
An opportunity for advisors
When the employer-owned life insurance legislation under IRC ?101(j) was enacted in 2006, advisors believed the only way to correct the situation on policies issued after Aug. 17, 2006 was to surrender the contracts and reissue new ones after proper notice and consent was obtained from affected employees.
However, a recent notice provides another option. It also creates an opportunity for advisors. A Section 1035 exchange to a new policy with a larger face amount or other material change is now deemed a new contract on which proper notice and consent can be obtained before issue.
It behooves advisors to review their EOLI records and identify those contracts for which notice and consent forms were not completed before the policies were issued.
This gives agents the opportunity to sit down with employers to review the situation and present them with options. The specter of being faced with paying federal income tax on the proceeds from the existing policies should make them interested in listening to your recommendations.
Denise M. Desautels is the vice president of brokerage sales at First American Insurance Underwriters Inc. of Needham, Mass. She has more than 20 years experience working with life insurance producers. She can be contacted at (800) 444-8715 or via e-mail at firstname.lastname@example.org. Visit FAIU at www.faiu.com.