American General Life Companies UPDATE. Reminder: Notice and Consent Requirements for Employer-Owned Life Insurance Remain in Effect

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1 American General Life Companies UPDATE MARKETING July 21, 2011 Bulletin Reminder: Notice and Consent Requirements for Employer-Owned Life Insurance Remain in Effect Accessible. Accountable. Aligned. American General s Service Promise This bulletin is to remind you that the new requirements for employer-owned life insurance passed by the Pension Protection Act are now in effect. Failure to follow these requirements will result in the death benefi t of employer-owned life insurance becoming income-taxable upon the death of the insured. What needs to be done To avoid having income tax imposed on the death benefi t of an employer-owned life insurance policy, the employer must comply with the notice and consent requirements of the Act. Our September 2006 Advanced Sales Digest, posted on our Web site under Sales & Marketing/Advanced Sales/Executive Benefits/Producer Materials, offers a more detailed explanation of the requirements. Note that, in essence, any sort of key employee life insurance, life insurance used to fund a buy and sell arrangement, or non-qualifi ed deferred compensation arrangement can be subject to these requirements, so careful attention needs to be given to this review. There is a copy of this particular Advanced Sales Digest attached to this bulletin. Additionally, for the convenience of your client s legal counsel, we created and posted specimen notice and consent documents to assist an employer in complying with the notice and consent requirements of the Act. Additional questions should be directed to the Advanced Sales Team at (800) American General Life Companies, is the marketing name for a group of affi liated domestic life insurers, including American General Life Insurance Company and The United States Life Insurance Company in the City of New York. FOR PRODUCER USE ONLY NOT FOR DISSEMINATION TO THE PUBLIC

2 Informational ideas important to large and complex cases PARTNERING FOR EXCELLENCE Advanced Sales Vol II, Issue 4 Sept 2006 THE PENSION PROTECTION ACT OF 2006: NEW REQUIREMENTS FOR EMPLOYER-OWNED LIFE INSURANCE by Ed Sanchez, CLU, ChFC, MBA MSFS Advanced Sales Consultant AIG Life Brokerage The Pension Protection Act of 2006 was signed into law on August 17, Like most bills which Congress passes, this one did not limit itself to the topic which its title might suggest. Among its many provisions are changes to pensions, Individual Retirement Accounts, charitable giving, and employer-owned life insurance contracts. Because of its significant impact on employer owned life insurance, this Advanced Sales Digest focuses exclusively on the new employer owned life insurance requirements and the sales opportunities created by these provisions. What is employer-owned life insurance? An employer-owned life insurance contract is generally one which is owned by a person engaged in a trade or business and such person is directly or indirectly a beneficiary of the contract, and it covers the life of an insured who is an employee of the trade or business on the date the contract is issued. In essence, any sort of key employee life insurance, or any life insurance used to fund a stock redemption plan or informally fund a nonqualified deferred compensation plan can be covered by the Act. New Section 101(j) A new Code Section101(j) applies to company-owned life insurance (COLI) and Bank-Owned Life Insurance (BOLI) for policies issued after the date of enactment, August 17, Generally, it provides that, for employer owned life insurance, the amount excluded as an income tax free death benefit cannot exceed the premiums plus any other amounts paid by the policyholder for the contract. The excess over this amount is taxable income. Important exceptions to this income inclusion are built into the Act. A set of exception rules is included, and, also the notice and consent requirements which must be met. Let s take a look at the details. Exceptions Exceptions allow the death benefit of an employer-owned life insurance contract to be fully paid income tax free. First, one or more of the following must apply: 1) The insured must have been an employee at any time during the 12 months prior to his or her death, 2) the insured was a director or highly compensated employee at the time the contract was issued. In other words, the insured must have been a director, a 5 percent or greater owner at any time during the preceding year, or, have received in excess of $95,000 in the preceding year (adjusted for continued on next page For agent use only. Not for public dissemination.

3 inflation), or was one of the five highest paid officers, or among the highest paid 35 percent of all employees, or 3) death benefits are paid to a member of the insured s family, an individual designated by the insured (other than the employer), a trust established by any such person, or the insured s estate. Second, all three of the following notice and consent requirements must be met. Note that all three requirements must be met prior to the issuance of the COLI contract: 1) the employee must be notified in writing that the employer intends to insure the employee s life. The notice must state the maximum face amount for which the employee could be insured at the time the contract is issued. 2) the employee must provide the employer with written consent to being the insured and that the employer may continue the coverage after the employee terminates employment, and 3) the employee must be informed in writing that the employer will be the beneficiary of any death benefits, and the maximum amount of insurance for which the employee could be insured at issue is stated at the time of notification. Reporting and record keeping requirements (Section 60391) Employers who own one or more policies subject to this act issued after the date of enactment (August 17, 2006) are required to file an informational return with the Internal Revenue Service for each year that the contracts are owned. The filing must include: Thus, an employer will need to file some information regarding these policies at some unknown deadline each year. Currently, the IRS has offered no further guidance on this reporting or record keeping requirement. Effective Dates Section 101(j) rules generally apply to employer-owned contracts issued after August 17, 2006, the date of enactment. Opportunities Although these requirements add additional employer paperwork requirements for employer-owned life contracts, the needs for and benefits of employer-owned life insurance continue to far outweigh these requirements. The opportunities today lie in making prospective clients and their counsel aware of the new requirements, and staying abreast of additional guidance from the IRS as it becomes available. Updates and additional information helpful to your employer-owned sale will be forthcoming soon on the AIG Life Brokerage Web site. Stay tuned. This is a very general discussion of the provisions of the new law. No agent or client can rely on this as legal or tax advice. Each business must review these rules with advisors to determine how they apply to the unique situation of each business. For producer use only. Not for use with the public. 1) the number of employees at the end of the year, 2) the number of employees insured at the end of the year, 3) the total amount of insurance in force at the end of the year, 4) the employer s name, address, taxpayer ID number, and the nature of the employer s business, 5) that the employer has valid consent for each insured and the number of insured employees for whom such consent was not obtained. For Agent Use Only - Not for Dissemination to the Public. AIG Life Brokerage 1200 N. Mayfair Rd. Suite 300 Milwaukee WI /

4 Please Note: This is a specimen document provided for the convenience of legal counsel retained by employers contemplating the purchase and ownership of life insurance on an employee s life. The contents of this specimen document do not constitute and may not serve to provide legal, tax or accounting advice to any party to the agreement or their respective legal, tax or accounting counsel. Parties contemplating participation in any agreements or arrangements described below should consult and rely upon their own legal, tax and accounting counsel to determine the appropriate use of this specimen document or any portion thereof. NOTICE TO EMPLOYEE OF EMPLOYER S INTENT TO OBTAIN LIFE INSURANCE COVERAGE This Notice is provided by (name of employer) Employer to (name of employee) Employee. Pursuant to this Notice, Employee is hereby notified that, because of Employee s economic value to Employer, the Employer seeks to obtain one or more life insurance policies insuring the life of the Employee constituting a maximum face amount of (face amount in numbers), (face amount in words) (the Policy ), subject to Employee s written acknowledgement and consent that: 1. Employee understands and acknowledges that Employer may be the sole owner and beneficiary of any and all economic benefits derived from Employer s ownership of the Policy. 2. Employee understands and acknowledges that Employer may retain and continue all incidents, rights and benefits of ownership of the Policy and continue the insurance coverage purchased on the life of Employee after Employee s separation from service or termination of employment with Employer. 3. Employee understands and acknowledges that if the Policy is issued, Employee s ability to procure additional life insurance on his/her life may be limited. 4. Employee understands and acknowledges that Employer, as policy owner, may have access to non-public and personally identifiable information collected during the insurance application process. I have received, read, and understand this notice: Employee Date

5 Acknowledged and Received by Employer: Employer s Authorized Representative Date Please Note: This is a specimen document provided for the convenience of legal counsel retained by employers contemplating the purchase and ownership of life insurance on an employee s life. The contents of this specimen document do not constitute and may not serve to provide legal, tax or accounting advice to any party to the agreement or their respective legal, tax or accounting counsel. Parties contemplating participation in any agreements or arrangements described below should consult and rely upon their own legal, tax and accounting counsel to determine the appropriate use of this specimen document or any portion thereof. EMPLOYEE CONSENT TO EMPLOYER OWNED LIFE INSURANCE Part One I, (name of employee), Employee, acknowledge that I have been notified in writing on (date of notice) that (name of employer), Employer, intends to purchase, own and maintain one or more life insurance policies insuring my life constituting a maximum face amount of (face amount in numbers) $, (face amount in words), (the Policy ). I hereby acknowledge and consent to the following: 1. I consent and agree to be the named insured under the Policy and understand that my ability to obtain additional insurance on my life in the future may be limited; 2. I consent and agree to undergo necessary and reasonable examinations with respect to Employer s acquisition of the Policy and to participate in good faith with respect to necessary and reasonable acts required by an insurer in order for the Employer to acquire the Policy;

6 3. I consent and agree, subject to the extent of any applicable laws 1, that Employer may retain all incidents, rights and benefits of ownership of the Policy, and continue the insurance coverage procured under the Policy after my separation from service or termination of employment with Employer; 4. I consent and agree to provide in timely manner all information requested by Employer and the insurer in connection with the issuance of the Policy; and 5. I consent and agree to an insurer s access to non-public personally identifiable information collected during the insurance application process. Part Two As of the anticipated issue date of (state the anticipated issue date), I expect to be (initial any applicable phrase(s)): 1. A director of Employer. 2. A five percent (5%) or greater owner of Employer at any time during the preceding year. 3. A recipient of more than $95,000 in compensation from Employer in the preceding year. 4. One of the five highest paid officers of Employer. 5. Among the highest paid 35% of all employees of Employer. Part Three I acknowledge that on the date of this Consent a representative of Employer met with me personally to review and explain the provisions of this Consent. Said representative answered my questions in terms that were understandable to me. I also understand and acknowledge that upon my death, unless otherwise mutually agreed to by Employer and me, Employer shall pay to my personally named beneficiary or beneficiaries the sum of (dollar amount or a percentage of the Policy death benefit payable) from the Policy death proceeds. Any proceeds paid under the Policy as a result of my death that exceed such stated amount shall be payable to Employer or its successor(s), assignee(s), beneficiary or beneficiaries. 1 State statutes may provide specific guidance with respect to the rights of employees consenting to serve as insureds under life insurance policies issued to and owned by their employers. Employees should retain independent legal counsel for advice with respect to the application of any such laws or statutes in their respective states of residence and/or employment.

7 This Consent is hereby entered into on the day and date listed below. Employee Date Acknowledged and Received by Employer: Employer s Authorized Representative Date

8 Informational ideas important to large and complex cases Advanced Sales Vol IV, Issue 1 March 2008 IRS ISSUES ANNUAL REPORTING FORM FOR EMPLOYER-OWNED LIFE INSURANCE by Ed Sanchez, CLU, ChFC, MBA, MSFS Section 101(j) of the Internal Revenue Code requires that, in order for the death proceeds of an employer-owned life insurance policy to be 100 percent income tax-free, the policy must satisfy certain statutory requirements. Passed in August 2006 as part of the Pension Protection Act, these requirements apply to employers who own or receive any benefit from life insurance on an employee s life. Most commonly, the requirements would apply to any key person life insurance, life insurance used for entity buy-sell purposes, or economic benefit regime split dollar life insurance (previously known as endorsement split dollar). Note that the form of business entity is irrelevant; the requirements apply to all employers whether they are corporations, pass through entities, or any other business form. Furthermore, it applies to any form of life insurance, including term, universal life, whole life, or any form of variable life or variable universal life which may be considered employer owned life insurance. BACKGROUND The Pension Protection Act of 2006 was signed into law on August 17, Among its many provisions were changes to pensions, Individual Retirement Accounts, charitable giving, and employer-owned life insurance contracts. What is employer-owned life insurance? An employer-owned life insurance contract is generally one which is owned by a person engaged in a trade or business and such person is directly or indirectly a beneficiary of the contract, and it covers the life of an insured who is an employee of the trade or business on the date the contract is issued. In essence, any sort of key employee life insurance, or any life insurance used to fund a stock redemption plan or informally fund a non-qualified deferred compensation plan, can be covered by the Act. Section 101(j) IRC Code Section 101(j) applies to company-owned life insurance (COLI) and Bank-Owned Life Insurance (BOLI) for policies issued after the date of enactment, August 17, Generally, it provides that, for employer owned life insurance, the amount excluded as an income tax free death benefit cannot exceed the premiums plus any other amounts paid by the policyholder for the contract. The excess over this amount is taxable income. continued on next page For agent use only. Not for public dissemination.

9 Important exceptions to this income inclusion are built into the Act. A set of exception rules is included, and, also the notice and consent requirements which must be met. Let s take a look at the details. EXCEPTIONS Exceptions allow the death benefit of an employer-owned life insurance contract to be fully paid income tax free. First, one or more of the following must apply: A) The insured must have been an employee at any time during the 12 months prior to his or her death; B) The insured was a director or highly compensated employee at the time the contract was issued. In other words, the insured must have been a director, a 5 percent or greater owner at any time during the preceding year, or, have received in excess of $105,000 in the preceding year (adjusted for inflation), or was one of the five highest paid officers, or among the highest paid 35 percent of all employees, or; C) Death benefits are paid to a member of the insured s family, an individual designated by the insured (other than the employer), a trust established by any such person, or the insured s estate. Second, ALL three of the following notice and consent requirements MUST be met. Note that all three requirements must be met prior to the issuance of the COLI contract: 1) The employee must be notified in writing that the employer intends to insure the employee s life. The notice must state the maximum face amount for which the employee could be insured at the time the contract is issued. 2) The employee must provide the employer with written consent to being the insured and that the employer may continue the coverage after the employee terminates employment, and; 3) The employee must be informed in writing that the employer will be the beneficiary of any death benefits, and the maximum amount of insurance for which the employee could be insured at issue, is stated at the time of notification. WHAT HAPPENS IF AN EMPLOYER DOES NOT COMPLY If the notice and consent requirements are not met by an employer, it will cause the policy death benefits in excess of premiums paid to become income taxable to the employer. Furthermore, unfortunately the Act or associated IRS regulations do not provide a remedy for correcting the error of not completing the forms prior to the date the policy is placed in force. Therefore, it is critical to be aware of these requirements and make your employer clients aware of the requirements. NEW REPORTING FORM IS ISSUED As a complementary provision to Section 101(j), Congress enacted section 6039I, which established reporting requirements with respect to employer-owned life insurance contracts. The Internal Revenue Service has now issued the reporting form that policyholders should complete and attach to their Form 1120 (or other tax form) on which they will be reporting their income taxes. The form is Form 8925 Report of Employer Owned Life Insurance Contracts. This IRS form is available by clicking on the hyperlink to the official forms site of the U.S. Government (www.forms.gov). The hyperlink is located at Advanced Sales/Employer Owned Life Insurance. continued on next page

10 Sales opportunity: Making lemonade from lemons This represents another tremendous opportunity to bring extremely relevant, vital insurance information to business clients and prospects and thus create the opportunity to review all of their business life insurance needs: key person, buy and sell, deferred compensation, and others. Bringing these requirements to an employer s attention demonstrates your higher insurance knowledge level and should help create an enhanced trust relationship with your business client or prospect. Form 8925 is very straightforward. It consists of four lines which request 1) the number of employees of the employer; 2) the number of insured employees (those with policies issued after August 17, 2006) who were insured at the end of the tax year; 3) the total amount of employer-owned life insurance in force at the end of the tax year; and 4) whether the employer/policy holder has a valid consent for each employee. That s it. An important note: Even though the statute was effective for contracts issued after August 17, 2006, the Form 8925 does not require any reporting for any tax year ending before November 14, American General Life Insurance Company is solely a provider of insurance products. American General Life Insurance Company, its employees, agents, and/or representatives do not provide tax, legal or financial advice. The comments made in this article are for information/discussion purposes only. Any questions you may have should be discussed with your tax or legal advisor. For Agent Use Only - Not for Dissemination to the Public. AIG American General 1200 N. Mayfair Rd. Suite 300 Milwaukee WI /

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