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IRS Taxation of Employer Owned Life Insurance

In general, life insurance benefits received upon the death of an insured are tax-free.  However, an IRS rule, codified in IRC Sec. 101(j), subjects employer owned life insurance benefits to taxation unless they qualify for an exception and Notice and Consent requirements are satisfied.

IRC 101(j) applies to employer-owned life insurance policies issued after August 7, 2006.  An employer-owned life insurance policy includes policies where a business is the owner, the business is the beneficiary, and the employee is the insured.  One of the following exceptions must be met for the benefits to be tax-free: 

  • The insured must be a key-person such as a director or highly-compensated employee;
  • The insured must have been an employee at some point in time during the prior twelve-month period prior to death;
  • The death benefits are paid to the insured's heirs;
  • The death benefits are used to purchase an interest in the business.

If one or more of the exceptions is met, then the employee needs to sign an written notice of consent to being insured  and the Company needs to annually file Form 8925 in order to qualify for tax-free treatment.  Keep in mind, these requirements apply to policies issued after August 17, 2006.

Gene M. Bowman, Attorney and CPA

Bowman Law Firm