A corporation purchased an employer-owned life insurance (EOLI) policy on a rank-and-file employee in 2019 but did NOT obtain written notice or consent from the employee before issuance. The employee dies. How is the death benefit taxed to the corporation?

Explanation

Under IRC §101(j), enacted by the Pension Protection Act of 2006, employer-owned life insurance issued after August 17, 2006 is subject to special rules. To preserve the full income-tax exclusion of the death benefit, the employer must (1) provide written notice to the employee of the insurance and the maximum face amount, (2) obtain written consent before issuance, and (3) meet one of the §101(j)(2) exceptions (e.g., insured was a director or highly compensated employee, or died within 12 months of separation). If these 'notice and consent' rules are NOT met, only the amount equal to premiums paid is tax-free — the gain (death benefit minus premiums) is taxable as ordinary income. Treating the whole proceeds as tax-free under the general §101(a) rule ignores §101(j). Taxing the whole benefit with no recovery at all of premiums confiscates basis. And the $50,000 ceiling belongs to the employee-level §79 imputed-income exclusion, not to corporate death benefits.