Download Form for Employer-Owned Life Insurance Notice and Consent

FORM FOR EMPLOYER-OWNED LIFE INSURANCE
NOTICE AND CONSENT REQUIREMENTS
Internal Revenue Code Section 101(j) creates new Notice and Consent
requirements that must be met before a policy is issued. Following is a form you
may use to comply with these requirements. If you submit an application for an
employer-owned life insurance policy, you should make sure that this form is
signed and submitted to the insurance carrier before the policy is issued. Failure
to comply with the new law means that part of the death benefit may be taxed as
ordinary income.
Definition.
The law defines “employer-owned life insurance” broadly. It includes any policy if:
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The owner engages in a trade or business, and
The owner (or a related party) is a beneficiary (direct or indirect), and
The insured is an employee at the time of policy issue, and
The insured is a U.S. citizen or resident.
Four Safe Harbors.
The form deals only with the Notice and Consent requirement. Both the Notice
and Consent and at least one of the four safe harbors specified in the new law
must be in place to keep the death benefit income tax free.
Safe Harbor 1: Key Person
The insured is a key person at policy issue. This safe harbor (unlike the others)
provides certainly at the time the policy is issued that the death benefit will
continue to be income tax free. The employer must keep good records. Possibly
many years from now, when the employee dies, the employer may have to prove
that the employee satisfied the key person rules when the policy was issued.
A key person for these purposes is someone who, at policy issue:
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Was a director of the employer.
Was a 5% or greater owner in the year before policy issue.
Received compensation of $95,000 or more (adjusted for inflation).
Was one of the five highest paid officers.
Was among the 35% highest paid employees.
You cannot know if the remaining safe harbors are available until the employee
dies. Until then, the employer won’t know for sure if the death benefit is taxable
or not taxable.
Safe Harbor 2: Current Employee
The insured was an employee any time in the 12-month period before death.
Safe Harbor 3: Death Benefit Paid to the Insured’s Heirs
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A member of the insured’s family (spouse, parents and grandparents,
children and grandchildren, brothers and sisters).
An individual the insured named (other than the employer).
A trust set up for anyone in those first two groups of people.
The insured’s estate.
Although this may avoid income tax on the death benefit, it does create a split
dollar arrangement. If the employer owns the policy and the person named as
beneficiary is any of these people, the arrangement is, by definition, split dollar.
The employee will be taxed on the economic benefit provided by the policy.
Safe Harbor 4: Buy-Sell Funds
Death benefits remain income tax free if used to buy the insured’s interest in the
employer (equity, capital or profits) from someone listed in Safe Harbor 3.
Reporting Requirements.
The IRS has released Form 8925 that is required to be filed by employers (with
their income tax return) that own “employer-owned life insurance contracts”. The
form itself contains the instructions. The form asks if the employer has a valid
consent form for each covered employee. If not, then the number of employees
for whom a valid consent does not exist must be listed.
DISCLAIMER.
These materials may not be used for penalty protection.
NOTICE AND CONSENT TO EMPLOYERS
APPLICATION FOR LIFE INSURANCE
NAME AND ADDRESS OF CARRIER:
1. EMPLOYEE (PROPOSED INSURED) INFORMATION
Full Name (First, Middle, Last. Include maiden name in parentheses.)
Street Address
Gender
F M
Date of Birth
MM/DD/CCYY
Social Security Number
City
State
Zip Code
City
State
Zip Code
Occupation
2. EMPLOYER (OWNER) INFORMATION
Full Legal Name
Street Address
3. NOTICE BY EMPLOYER (OWNER)
a. Employer intends to apply for insurance on the life of the Employee (Proposed Insured).
b. The maximum face amount the Employee (Proposed Insured) could be insured for at the time the contract is issued is $_______________________
c. The Employer will be the Owner of any policy issued and a beneficiary of any proceeds payable upon the Employee’s (Proposed Insured’s) death.
4. CONSENT OF EMPLOYEE (PROPOSED INSURED)
a. I consent to being an insured under the life insurance policy for which my Employer intends to apply.
b. I consent to my Employer continuing coverage, after my employment ends, under any policy issued.
c. I understand that my Employer will own the policy. Unless provided in a separate agreement, my Employer will receive all of the death proceeds, and
my personal representative, next of kin, and heirs at law will have no beneficial interest in the policy or its death proceeds.
AGREEMENT AND AUTHORIZATION
This form is provided as a convenience to the Employer and to obtain information that may be needed for information reporting services. By providing
this form, the carrier makes no representation that completing it will constitute compliance with any law or regulation, tax or otherwise. Federal tax law
specifies that the death benefits of certain employer-owned life insurance contracts will not be completely excluded from federal gross income of the
Employer unless notice-and-consent requirements and other requirements specified in the law are fulfilled.
The carrier and its representatives and distributors do not provide tax or legal advice. The carrier did not accept this form for use by any taxpayer to
avoid any Internal Revenue Service penalty. You should ask your independent tax and legal advisors for advice based on your particular situation.
A photocopy of this form shall be as valid as the original.
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Signature of Employee (Proposed Insured)
______________________________________
Date
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Signature of Employer (Owner)
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Date
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Title