Have you ever heard of “janitor policies” or “dead peasant insurance”? In the early 1990’s, large corporations, who we will not name, were buying business owned life insurance policies on their rank and file employees without their knowledge nor consent. Not just some employees, but in some cases, all of them! The death benefits were payable to the corporation with a small set amount going to the employees’s beneficiary. As one can imagine, the families of these employees were not thrilled about the arrangement and in 2006 the Pension Protection Act was passed including sections 101(j) and 60391 of the Internal Revenue Code, placing new rules on business owned life insurance contracts.
101(j) now requires both notice and consent of the insured prior to the issuance of a policy. Even to this day, there is very little understanding, or even awareness, of this rule. In fact, very few insurance companies will even ask for a notice and consent form, not wanting to shoulder any liability later when the claim is paid. In addition to requiring written notice and consent, annual filing of form 8925 with the IRS is also required. Failure to do either may result in the death benefit being taxed as ordinary income.
There are thousands of non-101(j)-compliant business owned policies that must be replaced to avoid liability and tax consequences. We can help.
Most policies that were written prior to the 2006 Pension Protection Act are likely to be grandfathered and nothing needs to be done. However, there are thousands of business owned policies (think buy/sell agreements and key-person policies) that have never filed notice and consent, let alone filing form 8925 annually. From everything we have learned, the only way to fix this problem is to replace those business owned life insurance with new policies and following the guidelines moving forward.
If you’re working with any business owners now, or you have any policies you’ve written in the past, call us today and we can help you get these compliant. Replacing these policies may come at a greater cost to your client now, but not in comparison with the tax consequence later.