Slug: /faqs-coli/
In business, as in life, certainty is the ultimate currency. Every successful organization eventually faces the reality that its greatest assets walk out the door every evening, and the “What If” of those assets not returning is what keeps most owners awake at night. Corporate Owned Life Insurance (COLI) is a sophisticated tool designed to bring order to that uncertainty, providing a structured way to protect the business and reward the people who build it.
At Schiff Executive Benefits, we specialize in Restoring Alignment and Retention. Because we were “in the room where it happened”, with Matt Schiff helping draft the very laws that govern these plans, we provide a level of technical depth you won’t find elsewhere.
What is Corporate Owned Life Insurance (COLI)?
Corporate Owned Life Insurance (COLI) is a life insurance policy taken out by a business on the life of a key employee or executive. The company pays the premiums, owns the policy, and is typically the beneficiary. It serves two primary purposes: protecting the company against the financial loss of a key leader and providing a tax-advantaged vehicle to informally fund executive benefit programs like a NQDC Complete Guide.
Who can be insured under a COLI plan?
Under modern regulations, you cannot simply insure any employee. To qualify for favorable tax treatment, the insured must generally be a “highly compensated” employee or part of a “Top Hat” group. This typically includes the top 35% of the company’s highest-paid employees or those defined as highly compensated under IRC 414(q). For a deeper look at how to structure these groups, see our COLI Strategic Guide.
What is IRC 101(j) and why does it matter?
IRC 101(j) is often referred to as the “COLI Best Practices Law.” Enacted in 2006, it establishes strict notice and consent requirements that must be met before a policy is issued. Our President, Matt Schiff, was a ranking member of the AALU’s NQDC Committee and worked alongside Michael Goldstein to help draft these very regulations. If you don’t follow these rules to the letter, you risk losing the tax-free nature of the death benefit.
What is IRS Form 8925 and who needs to file it?
Any employer that owns one or more employer-owned life insurance contracts must file IRS Form 8925 annually. This form reports the number of employees covered, the total amount of insurance in force, and confirms that valid consent was received for each insured individual. Failing to file this or making errors is one of the most common 7 BOLI/COLI Mistakes we see in the industry.
What happens if we don’t comply with IRC 101(j)?
The consequences are severe. If you fail to meet the notice and consent requirements, the death benefit, which is usually tax-free, becomes taxable income to the corporation at its marginal tax rate. This can turn a calculated financial strategy into a massive, unexpected tax liability, undermining the entire goal of the program.
Is COLI the same as Split Dollar?
No. In a traditional COLI arrangement, the company owns 100% of the policy and the employee has no rights to the cash value or death benefit. In contrast, Split Dollar Architecture involves an agreement where the employer and employee share the costs and benefits of the policy. COLI is generally simpler to administer and does not result in imputed income to the employee.
What’s the difference between COLI and BOLI?
The “C” stands for Corporate and the “B” stands for Bank. They are fundamentally the same insurance concept, but they are governed by different accounting standards (FASB for corporations vs. OCC/interagency guidelines for banks). Both rely on the same tax-advantaged principles to offset the rising costs of employee benefits.
Can COLI help us recover the cost of executive benefits?
Absolutely. This is often called “full cost recovery.” By using the tax-advantaged growth within the policy and the eventual death benefit, a company can recover the cost of the premiums, the cost of the benefit payments, and even the “time value” of the money used. You can learn more about this math in our post on SERP + COLI Cost Recovery.
How does COLI work with a SERP or NQDC plan?
COLI is the “engine” that powers these plans. While a SERP Guide outlines the promise you make to an executive, the COLI policy provides the cash to fulfill that promise. It sits on the corporate balance sheet as an asset that grows tax-deferred, matching the growing liability of the deferred compensation promise.
How many employees can we cover?
There is no hard “cap” on the number of employees, but the group must meet the “highly compensated” or “director” criteria set forth in IRC 101(j). Most companies focus on the “Top Hat” group, the key decision-makers and high-impact producers who represent the greatest risk and value to the firm.
Can the death benefit be taxed?
Yes, but only if you fail to comply with the regulations. If IRC 101(j) requirements are met, the death benefit remains tax-free. This is why working with an expert who was involved in the legislative process is critical. We ensure your plan is built on a foundation of compliance, protecting your Perfect Plan® from IRS scrutiny.
Does COLI require 409A compliance?
While COLI itself is an insurance product, the plan it funds (like a deferred compensation agreement) is almost certainly subject to IRC 409A. This law governs the timing of deferrals and distributions. Because Matt Schiff helped draft these rules, we integrate COLI funding with a robust 409A Compliance guide to ensure you avoid the 20% excise tax penalties.
What happens to COLI policies when an executive leaves the company?
The company generally has three options: maintain the policy (if consent was properly obtained), surrender the policy for its cash value, or, in some cases, sell or transfer the policy to the executive as part of a retirement package. The flexibility to keep the policy in force even after the executive leaves is one of the reasons COLI is such a powerful cost-recovery tool.
How do we choose a carrier for COLI?
Choosing a carrier is about more than just the lowest premium. You need a carrier with a strong “Comdex” rating, a history of stable dividend performance (for whole life), or competitive institutional pricing (for VUL/IUL). As independent brokers, we reverse engineer the solution: starting with your goals and then selecting the carrier that fits the plan, rather than forcing a “product” on you.
Is COLI right for our business?
If you are asking “What If” our top talent leaves, or “What If” we can’t afford to pay out our retirement promises, then COLI deserves a look. It is ideal for profitable companies looking to attract, retain, and reward key talent while protecting the bottom line.
To see how these strategies fit into a broader vision, check out The Perfect Plan® podcast/post where we discuss the reverse engineering process we use for every client.
Ready to Build Your Perfect Plan®?
Stop worrying about the “What Ifs” and start planning for the “Whens.” Whether you are looking to protect your business from the loss of a key leader or you need to fund a sophisticated executive benefit plan, we are here to guide you with decades of technical expertise.
Click here to value your business and explore your options via our RISR application.
Disclaimer: Schiff Executive Benefits does not provide tax or legal advice. You should always consult with your own professional tax and legal advisors before implementing any executive benefit or insurance program. Our role is to work alongside your team to ensure the technical design matches your corporate goals.