If an employer with an EOLI policy fails to comply with the notice and consent regulations or covers the wrong types of employees, it would lose that tax-free status upon receipt of the death benefits for the portion that exceeds the premiums already paid, and that comes with major financial implications, says Ken Kies, managing director of the Federal Policy Group, a consulting firm in Washington, D.
Hall adds that the financial implications can be especially strong because, as in Kies' example, employers have typically paid much less in premiums than the till policy amount, which is why EOLI is so attractive in the first place.
Often these highly compensated employees are also so indispensable that an employer might purchase EOLI on their lives to protect what they bring to the business, Headley says.
Some employers also choose to purchase EOLI to fund buy-sell agreements, Kies adds.
Other reasons to purchase EOLI are redeeming the stock of a deceased employee or shareholder and funding executive benefits, which include prerefirement salary continuation benefits and deferred compensation benefits, Headley says.
On the IRS Form 8925, employers must outline the number of workers employed, the total amount of workers who were insured at the end of the year under EOLI and the full dollar amount of EOLI at the end of the year.
Winn-Dixie was not alone in maintaining EOLI policies on a broad base of employees.
section]101(j) provides that the death benefits received under an EOLI policy in excess of the premiums paid for the policy (excess death benefits) are included in the employer's gross income, except in the case of certain EOLI policies for which the notice and consent requirements of I.
section]101(j)(2) provides two classes of exceptions to the general rule that excess death benefits received under an EOLI policy are taxable, which exceptions apply only if the notice and consent requirements are satisfied.
The second class of exception is for certain amounts paid to the insured's heirs, and applies to 1) amounts paid to a member of the family of the insured, (11) an individual who is the designated beneficiary of the insured under the EOLI policy (other than the employer), a trust established for the benefit of any such member of the family or designated beneficiary, or the estate of the insured; or 2) amounts used to purchase an equity (or capital or profits) interest in the policy holder from a person described in clause one (e.
section]101(j)(4) requires that each of the following three notice and consent requirements must be satisfied before the EOLI policy is issued:
1) The employee must be notified in writing that the employer intends to insure the employee's life and the maximum face amount for which the employee could be insured at the time the EOLI policy was issued.