101j Business owned life insurance

Question 1

What are the five new rules under the section 101(j) of the internal revenue code?

Answer 1

1. Notice – The employee must receive written notice of the policy, the maximum death possible face amount of the policy and that 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. Exceptions – If the notice and consent requirements are met before the policy is issued and the insured falls into one of the following categories at the time the policy is issued, then the death benefit proceeds received by the employer will be income tax free.
4. Exceptions for Family Beneficiaries and Stock Redemption– The exception is valid if the notice and consent requirements are met before the policy is issued and the death benefit is paid
5. Employer Reporting and Recordkeeping Requirement –employers who own one or more
   COLI contracts issued after August 17, 2006 are now required to file a return with the IRS for each year the
   contracts are owned.

Question 2

What are three criteria that could allow an employer to not have to pay income tax on death benefits received?

Answer 2

A) Insured is an employee at any time during the 12
months preceding his/her death
B) Insured is a director or among the highest paid
35% of all employees
C) Insured is a highly compensated employee

Question 3

under the Exceptions for family beneficiaries and stock redemption, the death benefits must go to: (2)

Answer 3

A) A member of the insured’s immediate family, to the
insured’s designated beneficiary under the policy,
to a trust for the benefit of a family member or designated beneficiary or to the estate of the
insured
B) Used to purchase an equity interest from a family
member, beneficiary, trust or estate

Question 4

What are the five items that must be stated in a return with the IRS for each year the contract is owned?

Answer 4

a) The number of employees at the end of the year
b) The number of employees insured under COLI
contracts at the end of the year
c) The total amount of insured in force under the
COLI contracts at the end of the year
d) The employer’s name, address and taxpayer ID#
and the employer’s business
e) That the employer has a valid consent form for
each employee and the number of insured
employees from whom a consent was not
obtained.

Question 5

What is the potential impact section 101(j) has on life insurance?

Answer 5

Section 101(j) will potentially impact life insurance policies that are used in a variety of employee benefit and business planning arrangements, including non-qualified deferred compensation, key person insurance, some buy-sell arrangements, some split dollar arrangements, section 457(f) plans and bank owned life insurance.