Section 101(j) Notice and Consent Requirements, Explained

Section 101(j) notice and consent requirements decide whether a company-owned life insurance policy pays its death benefit income tax free or partly taxable. Before the policy is issued, the business has to tell the employee in writing that it plans to insure their life and for up to what amount, tell them the business will be a beneficiary, and get their signed consent, including consent to coverage continuing after they leave. The insured also has to fit one of the exceptions in the statute, and the company files Form 8925 with its tax return every year it owns the policy. Miss the paperwork and the proceeds above the premiums paid can become taxable income to the company.

Why Section 101(j) Exists

Before 2006, some large companies bought life insurance on broad groups of rank-and-file workers, often without the workers knowing, and collected the proceeds tax free, sometimes years after the person had left. The press called it "janitor insurance." Congress answered in the Pension Protection Act of 2006 by adding Section 101(j) to the tax code.

The rule was aimed at those programs, but it applies to every employer-owned policy issued after August 17, 2006. That includes the ordinary tools a closely held business uses: the key person policy on a top producer, the buy-sell policy the company owns on a partner, the whole life policy quietly backing a deferred compensation promise.

A policy issued before that date can be pulled in later. A material change, such as a meaningful increase in the death benefit, can cause it to be treated as a new policy. Growth from dividends buying paid-up additions under the policy's own terms generally is not treated that way.

The Three Notice and Consent Requirements

All three have to be in writing, and all three have to happen before the policy is issued.

1. Notice of intent and the maximum amount. The employee is told that the company intends to insure their life, and the maximum face amount they could be insured for at the time the policy is issued.
2. Notice that the company is a beneficiary. The employee is told in writing that the business will receive proceeds when they die.
3. Signed consent. The employee agrees in writing to being insured and to the coverage continuing after their employment ends.

The Maximum Face Amount Detail

This one catches growing companies. A buy-sell price or a key person need tends to rise with the value of the business, and the company may want more coverage later. Coverage above the maximum stated in the notice can fall outside the protection, which is why the notice is often drafted with a maximum that leaves room to grow. Settle that number with your attorney at the start.

Why "Before Issue" Matters So Much

Carriers commonly include a notice and consent form in the application packet, and it is easy to skip in a busy closing. Signing the application and taking the medical exam show the person knew about the policy, but they do not replace the specific written notice the statute asks for.

If a policy was issued without it, the fix is rarely simple. IRS guidance allows a narrow correction for some inadvertent misses that are caught quickly and while the insured is living. Outside that window, the answer may be replacing the policy with proper paperwork or changing who owns it. That is a question for counsel, and it is far easier to get right on day one.

The Exceptions Under Section 101(j)

Notice and consent is the price of admission. The policy also has to fit one of two groups of exceptions, and those exceptions only apply when the paperwork was done.

Exceptions Based on Who the Insured Is

• The insured was an employee at any time during the 12 months before death.
• At the time the policy was issued, the insured was a director, a highly compensated employee, or a highly compensated individual as the tax code defines those terms.

Exceptions Based on Where the Money Goes

• The proceeds are paid to a member of the insured's family, a beneficiary the insured named (other than the company), a trust for those people, or the insured's estate.
• The proceeds are used to buy the insured's ownership interest from those same people, which is how an entity redemption buy-sell typically works.

In a closely held business, the people worth insuring usually fit these exceptions without much effort. In our experience the failure point is almost always the missing signature, not the exception.

Form 8925 Reporting Every Year

Each year a company owns employer-owned policies issued after August 17, 2006, it files Form 8925 with its federal income tax return. The form reports:

• The number of employees at the end of the year.
• How many of them are insured under employer-owned policies.
• The total amount of that insurance in force.
• Whether valid consent was received for each insured employee, and if not, how many are missing.

The company should also keep records that show it met the notice and consent rules. The current form and instructions are on the IRS page for Form 8925. Notice that the form asks about consent directly, so a missing signature is not something that stays hidden.

Which Business Policies Trigger These Employer Owned Life Insurance Rules

If the business is the owner and an employee is the insured, assume Section 101(j) applies until your attorney says otherwise. Common examples:

• Key person coverage owned by the company. Our guide to key person insurance for small business covers the rest of that design.
• Corporate owned life insurance in general, including policies that informally fund a SERP or deferred compensation plan.
• Entity redemption buy-sell policies, where the company owns a policy on each owner.

When the employee owns the policy, as in a Section 162 executive bonus arrangement, the coverage generally is not employer-owned and these requirements do not apply. A cross purchase buy-sell, where the owners hold policies on each other, usually falls outside as well, although related-party rules can reach an owner with a large stake. Have your attorney confirm how your structure is treated.

How We Handle Notice and Consent With Your Advisors

Every business case we work on has three roles. Your attorney drafts the agreements and the notice. Your CPA confirms the tax treatment and files Form 8925. Cornerstone designs and places the insurance, often on participating whole life insurance so the cash value sits on the company's balance sheet as a real asset.

On our side, that means the consent form is signed and dated before the policy is issued, a copy lives with the policy file, and our annual reviews flag any face amount increase or new policy that may need fresh paperwork. You can see how this fits with buy-sell funding and executive benefits on our page of life insurance strategies for business owners.

If your company already owns policies and nobody can find the consent forms, that is worth knowing now rather than at a claim. Schedule a policy review and we will go through what you have alongside your attorney and CPA.