Can I insure anyone with Corporate Owned Life Insurance?

No. Insurance carriers will only insure “highly compensated” or management employees.

What is the percentage of employees that can be covered in a COLI plan?

In 2006, Congress established a law called the COLI Best Practices Law IRC 101(j) that was part of the American Pension Protection Act of 2006. The law established very strict rules on the purchase rules by a corporation of Life Insurance on its employees. For the death benefit to be tax free the company must adhere to the following:

  • Must get Consent to Purchase the insurance prior to application
  • Must Notify the insured that the policy will remain on his/her life even after separation from service
  • Must be a highly compensated person (Top Hat definition)
  • Must Notify the Insured How Much he/she will be insured for

If the employer does not adhere to the above rules, the insurance will be taxed at the corporate marginal tax rate. As part of the Corporate Owned Life Insurance Program, that may or may not be owned by Trust on behalf of the corporation, the owner of the policies must file IRS Form 8925 for all policies purchased after January 1, 2007.

Is COLI split dollar?

No. The employee has no rights to the cash value or the face amount of the policy and thus, does not recognize any imputed income. The company may design a Survivor Benefit Plan which continues income to the employee’s family upon a pre-mature death, but this is a salary payable from the employer to the family and not a life insurance benefit.

**The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding and Federal Tax penalties. Schiff Executive Benefits, its employees and representative are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.