To qualify for the tax-free status, an employee insured under an EOLI policy must be either a director within the company or a highly compensated employee.
EOLI policies are restricted to certain types of employees because before the Pension Protection Act of 2006 was enacted, some employers tried to take advantage of the tax-free status by insuring everyone in the company, which is known as janitors insurance, Hall says.
Experts say those tax advantages are especially attractive to business owners who are looking to recruit, reward and retain top management with non-qualified deferred compensation plans, the largest market for EOLI sales.
A non-qualified deferral plan, informally funded with EOLI, is an efficient way to offer that.
In Notice 2009-48, the IRS provides additional guidance regarding EOLI
contracts in a question-and-answer format.
by the Pension Protection Act of 2006 to combat perceived abuses of EOLI policies.
2) Employers initially benefited from EOLI policies through the receipt of tax-free insurance proceeds upon the death of an insured employee, and from the deduction of interest on debt incurred to finance the premiums payable under the EOLI policies, thereby effectively creating a tax shelter.
Congress added IRC section 101(j) to address abuses with EOLI
The first of the 17 questions answered deals with the nature of persons that can own an EOLI
Unless an EOLI
contract falls within certain exceptions, then a portion of the death proceeds will be subject to income tax.
409A hasn't hurt sales of EOLI
, but it has shifted the focus to alternative compensation designs," says Viliesis.
If the owner is not a business, the EOLI
roles don't apply.