The Pension Protection act of 2006 includes new rules on business owned life insurance. The new rules have been incorporated into the provisions of Sections 101(j) and 60391 of the Internal Revenue Code.

Your client’s business owned life insurance policies could be subject to ordinary income tax.

Following are the specific requirements under the Section:

1. Notice – The employee must receive written notice of the policy death benefit and stating the employer will be the beneficiary of the policy death benefit.

2. Consent – The employee must provide written consent to being insured even after he/she terminates employment.

3. Form 8925 – MUST be filed each year with the business owner’s tax forms.

Both the Notice and Consent must be met before the policy is issued. The Filing of Form 8925 must be done with the business owner’s annual taxes each and every year. All three of the above steps must be met in order for the employer to receive death benefit proceeds income tax free.

Given these rules, unless these policies meet all three provisions noted above, the death benefit proceeds on such a policy could be subject to ordinary income tax. From everything we have learned, the only way to fix this problem is to replace your clients business owned life insurance with a new policy and follow the above guidelines moving forward.

You should call us today at (800) 846-3997 and we’ll answer your questions on 101(j) and how your client’s policies may be subject to ordinary tax.