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Please note that tax laws change almost daily and that each situation is unique and although we strive to provide current information, none of the information found on these pages can replace the advise of a tax professional. We strongly recommend you consult with a tax professional about your individual situation to ensure proper application of tax laws. We are not responsible for the use of these links as your only source of tax information.
True or False: Life Insurance Proceeds are tax-free? By: Steven B. Gallo
It depends. On August 17, 2006, the U.S. Congress passed the Pension Protection Act of 2006 (PPA 2006). The 900-page bill contains a number of provisions dealing with qualified retirement plans. As with most bills passed by Congress the scope of PPA 2006 was not limited to just the title of the bill. Buried into the bill are two requirements that effect employer-owned life insurance, the notice and consent requirements of IRC Sec. 101(j)(4) and the reporting requirements of IRC Sec. 60391. Failure to comply with these requirements will make only the premiums paid to purchase the policy tax-free. All other proceeds paid from the policy will be taxed in the highest bracket as ordinary income.
Your first question probably is “What is Employer Owned Life Insurance?” Great question. Employer-owned Life Insurance or EOLI, is any life insurance that a business owns on an employee’s life. The problem is that EOLI can cover policies that might not normally be considered employer-owned. EOLI would include polices purchased for redemption buy sell agreements, key man insurance, deferred compensation plans, and Split –Dollar Arrangements.
If you have any insurance that you think might be EOLI, don’t panic just yet. If the notice and consent requirements of IRC Sec. 101(j)(4) and the reporting requirements of IRC Sec. 60391 are met then all of the proceeds will continue to be tax-free. Now is the time to review these arrangements with you tax, legal, and financial advisors to be sure your arrangement is brought into compliance.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Securities and advisory services offered through Financial Network Investment Corporation, member SIPC. Gallo & Associates and Financial Network Investment Corporation are not affiliated companies.
