Under prior law, death benefits paid to an employer under an employer-owned life insurance policy on the life of an employee were generally tax-free to the employer.   Now for life insurance policies issued after the date of enactment of the Pension Protection Act of 2006 (the “Act”), death benefits paid to an employer under such an employer-owned life insurance policy is taxable to the employer unless: (1) proper notice is given to the insured employee; (2) proper consent is obtained from the employee; and (3) any one of the following applies:
     The insured was an employee of the policy holder at any time during the 12-month period before the insured’s death;
     At the time the insurance contract was issued, the insured was a director, “highly compensated employee” (i.e., a 5% owner during the year or preceding year or for the preceding year had compensation in excess of $100,000, adjusted for inflation) or a “highly compensated individual” (i.e., one of the 5 highest paid officers, a shareholder who owns more than 10% of the employer’s stock or among the highest paid 35% of all employees);
     Proceeds are paid to the insured’s “family” (limited to siblings, spouse, ancestors and/or lineal descendents), any individual beneficiary (as long as the named individual is not also the employer), a trust established for the insured’s family or the named beneficiary, or estate of the insured; or
     Proceeds are used to purchase the insured’s interest in the employer from any of the persons described in subparagraph (c) above.
      Proper notice to the insured must be in writing and notify the employee that the employer intends to insure the employee’s life, the employer will be a beneficiary of any proceeds payable upon the employee’s death and must specify the maximum face amount for which the employee could be insured at the time the policy was issued.  Proper consent requires that the insured consent to coverage in writing and acknowledge that the coverage may continue after the insured terminates employment.
 If these requirements are not met, the employer will be subject to taxation on the entire policy proceeds received, minus the premiums paid under the policy.  Therefore, it is very important that any employer who plans to insure the life of an employee ensure that these new requirements are met prior to obtaining the policy.