Split-Dollar + COLI/EOLI
Employer-Owned Life Insurance (EOLI): The Section 101(j) Rules
Published October 8, 2026 · Updated October 9, 2026
Technical summary / key takeaways
- Section 101(j)(3) defines an employer-owned life insurance contract as one owned by a person engaged in a trade or business that is directly or indirectly a beneficiary, covering someone who is an employee on the issue date.
- The default rule under section 101(j)(1) limits the exclusion to premiums and other amounts paid; the full exclusion is not automatic.
- A section 101(j)(2) exception and pre-issuance notice and consent under section 101(j)(4) are both needed to exclude the full death benefit; neither one alone lifts the cap.
- Section 6039I requires an applicable policyholder to file a return for each year it owns covered contracts, a reporting duty separate from the exclusion question.
- Notice 2009-48 states that "employee" includes an officer, director and highly compensated employee (A-5), and that a sole proprietor's contract on his or her own life is not an employer-owned contract (A-3).
Technical Summary: Section 101(j) and Employer-Owned Life Insurance
When a business owns a life insurance contract, is directly or indirectly a beneficiary, and the insured is its employee on the issue date, section 101(j)(1) caps the excluded death benefit at the premiums and other amounts paid. The cap is lifted only where a section 101(j)(2) exception applies and written notice and consent were obtained before issuance.
Owners, finance leads and HR directors may meet this rule when a company insures a key person, funds an executive benefit or backs a buy-sell obligation with a policy the company owns. Business Life Insurance treats the policy as the funding mechanism inside that plan; section 101(j) of the Internal Revenue Code can cap how much of the proceeds the business excludes from gross income.
The framework has four parts. Section 101(j)(1) sets the cap. Section 101(j)(2) lists exceptions, available only where the section 101(j)(4) notice-and-consent requirements are met. Section 6039I imposes annual reporting, made on Form 8925. IRS Notice 2009-48 answers definitional questions as of its date.
What Is an Employer-Owned Life Insurance Contract?
The statute supplies the definition. Under 26 U.S.C. § 101(j)(3)(A), an employer owned life insurance contract is a life insurance contract that "(i) is owned by a person engaged in a trade or business and under which such person (or a related person described in subparagraph (B)(ii)) is directly or indirectly a beneficiary under the contract, and (ii) covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued."
The "applicable policyholder" is the owner described in that test, and under section 101(j)(3)(B)(ii) it also includes persons related to the owner under section 267(b) or 707(b)(1), or engaged in trades or businesses with the owner that are under common control. Section 101(j)(5)(A) provides that "employee" includes "an officer, director, and highly compensated employee." Notice 2009-48 A-5 adds that a director is an independent contractor in that capacity, and that special rules relate to certain former employees and self-employed individuals.
Ownership matters. Notice 2009-48 A-1 states that a contract "owned by the owner of an entity engaged in a trade or business (such as for purposes of financing the purchase of an equity interest of another owner)" is not an employer-owned contract. Under A-3, partnership or sole-proprietorship ownership does not prevent EOLI treatment, but a sole proprietor's contract on his or her own life is not one.
A group term policy paying only the employee's family, with no business beneficiary, falls outside the definition. Corporate-owned life insurance (COLI) is the common name when the owner is a corporation; section 101(j) reaches any trade or business form.
The Applicable Rules: Section 101(j) and Section 6039I
The starting point is the general exclusion. Section 101(a)(1) provides that "gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured." That rule yields to listed exceptions, including transfer for value under section 101(a)(2) and subsection (j).
Section 101(j)(1) then provides that for an employer-owned contract, the excluded amount "shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract." The excess is not excluded.
Section 101(j)(2) lists exceptions that apply only to a contract "with respect to which the notice and consent requirements of paragraph (4) are met": one based on the insured's status, one for amounts paid to the insured's heirs or used to buy an equity, capital or profits interest in the policyholder from them.
Section 6039I(a) requires every applicable policyholder owning contracts "issued after the date of the enactment of this section" to file an annual return. Section 6039I(c) gives its terms the section 101(j) meanings.
On timing, Notice 2009-48 states that section 101(j) applies to life insurance contracts issued after August 17, 2006, except for a contract issued after that date in a section 1035 exchange for a contract issued on or before that date. Any material increase in the death benefit or other material change causes the contract to be treated as a new contract.
Requirements for the Full Death-Benefit Exclusion
Two conditions work together. The insured fits a section 101(j)(2) exception, and the section 101(j)(4) notice and consent were completed before issuance. An exception without notice and consent leaves the cap in place, and so does notice and consent without an exception.
The status exceptions, section 101(j)(2)(A). The insured either "was an employee at any time during the 12-month period before the insured's death," or is, when the contract is issued, a director, a highly compensated employee, or a highly compensated individual, each within the meaning the statute specifies.
The heirs exception, section 101(j)(2)(B). The amount is paid to a family member under section 267(c)(4) (brothers, sisters, spouse, ancestors and lineal descendants), to a designated beneficiary other than the applicable policyholder, to a trust for any of them, or to the insured's estate, or the amount is used to buy an equity, capital or profits interest in the policyholder from one of those persons.
Notice and consent, section 101(j)(4). "Before the issuance of the contract," the employee is notified in writing of the intent to insure and "the maximum face amount," gives written consent to being insured and to coverage that "may continue after the insured terminates employment," and is informed in writing that the policyholder will be a beneficiary.
Employer-owned life insurance notice and consent and Form 8925 reporting need individual review of the contracts involved by the insurers and a qualified tax professional.
How the Section 101(j) Rules Work in Practice
The analysis happens when proceeds are paid, and it looks at the issue date and, for the employee exception, the 12 months before death. The applicable policyholder asks two questions: did an exception fit the insured, and were written notice and consent in place before issuance?
If both answers are yes, section 101(j)(2) provides that the cap of section 101(j)(1) "shall not apply," leaving the section 101(a)(1) exclusion, subject to its other limits. If either answer is no, the excludable amount cannot exceed the premiums and other amounts the policyholder paid, and the remainder is not excluded.
Notice 2009-48 A-13 describes limited relief. The IRS states it will not challenge an exception based on an inadvertent failure if the policyholder made a good-faith effort, such as a formal system for new employees; the failure was inadvertent; and it was discovered and corrected no later than the tax-return due date for the year of issuance. A-13 adds that the failure "cannot be corrected after the insured employee has died."
A-7 confirms that a wholly owned corporation and its employee-owner are not excused, and that "actual knowledge alone" does not replace written notice and consent.
Who This Is For: Businesses That Own Life Insurance on Employees
Section 101(j) matters to any trade or business that owns a policy on an employee and stands to receive the proceeds. That includes corporations holding key-person cover, companies using policies to informally fund deferred compensation or supplemental executive benefits, and employers holding a death-benefit interest in an arrangement. The roles of owner, payer and beneficiary are set out in how business life insurance works.
Partnerships are included. Notice 2009-48 A-3 confirms a partnership-owned contract can be an employer-owned contract; life insurance between business partners raises related ownership questions.
Buy-sell planning splits by owner. A policy owned by a business on an employee can fall within section 101(j)(3), while Notice 2009-48 A-1 states that a contract owned by an entity's owner, such as to finance buying another owner's equity interest, is not an employer-owned contract; buy-sell life insurance covers both structures.
Premiums are a separate question. Section 264(a)(1) provides that "no deduction shall be allowed" for premiums on any life insurance policy "if the taxpayer is directly or indirectly a beneficiary under the policy," whatever the section 101(j) outcome.
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When Section 101(j) Applies
Four facts, read together, bring a contract within the statute:
- A person engaged in a trade or business owns a life insurance contract (section 101(j)(3)(A)(i)).
- That owner, or a related person under section 101(j)(3)(B)(ii), is directly or indirectly a beneficiary.
- The insured is an employee of the owner's trade or business on the issue date (section 101(j)(3)(A)(ii)), and under section 101(j)(5)(B) is a United States citizen or resident.
- The contract was issued after August 17, 2006, or is treated as a new contract issued after that date because of a material increase in the death benefit or other material change (Notice 2009-48).
The statute sets no minimum business size or number of insured employees. Under section 101(j)(3)(A), if coverage for each insured under a master contract is treated as a separate contract for purposes of sections 817(h), 7702 and 7702A, coverage for each such insured is treated as a separate contract.
When Section 101(j) May Not Apply
Several situations sit outside the definition, each depending on the facts of the contract:
- A contract issued on or before August 17, 2006, or issued after that date in a section 1035 exchange for such a contract, unless a material increase in the death benefit or other material change causes it to be treated as new (Notice 2009-48).
- A sole proprietor's policy on his or her own life (Notice 2009-48 A-3).
- A contract owned by an entity's owner, for example to finance buying another owner's interest (Notice 2009-48 A-1).
- A contract owned by a qualified plan or VEBA sponsored by a business, which Notice 2009-48 A-1 states is not an employer-owned life insurance contract.
- A policy under which the business is not directly or indirectly a beneficiary, such as group coverage paying only the employee's chosen beneficiary.
- A policy on someone who is not an employee on the issue date (section 101(j)(3)(A)(ii)).
Moving a policy from one owner to another can change both its section 101(j) status and its transfer-for-value treatment under section 101(a)(2), which has its own exceptions in section 101(a)(2)(B). Whether a given arrangement falls outside section 101(j) turns on ownership, beneficiary designations, issue dates and contract history.
Compliance Considerations: Form 8925 and Annual Reporting
Reporting runs every year, not only at issuance or death. Section 6039I(a) requires an applicable policyholder owning one or more covered contracts to file a return "showing for each year such contracts are owned":
- the number of employees at year-end;
- the number of those employees insured under the contracts;
- the total amount of insurance in force at year-end;
- the policyholder's name, address, taxpayer identification number and type of business; and
- that the policyholder has a valid consent for each insured employee, or the number without one.
Section 6039I(b) requires each applicable policyholder owning such contracts to "keep such records as may be necessary for purposes of determining whether the requirements of this section and section 101(j) are met."
Filing is a separate duty from qualifying for the exclusion.
Common Errors in Employer-Owned Life Insurance Planning
Treating one condition as enough is one source of error. Points that are easy to get wrong include:
- Relying on consent alone. Notice and consent without a section 101(j)(2) exception leave the section 101(j)(1) cap in place.
- Relying on job title alone. An officer counts as an employee under section 101(j)(5)(A), but the exception still depends on the section 101(j)(2)(A) tests, measured at issuance or during the 12 months before death.
- Late paperwork. Section 101(j)(4) requires notice and consent "before the issuance of the contract"; Notice 2009-48 A-13 states that section 101(j) contains no provision for correcting an inadvertent failure, describes limited conditions under which the IRS will not challenge an exception, and states that a failure to obtain written consent "cannot be corrected after the insured employee has died."
- Stale consents. Form 8925 treats a consent as invalid if issuance comes more than a year later or after employment ends, whichever is earlier.
- Assuming older contracts always stay outside. A material increase in the death benefit or other material change generally causes a contract to be treated as new (Notice 2009-48).
- Filing once. Section 6039I calls for a return each year the contracts are owned.
- Merging two rules. Section 264(a)(1) premium treatment and section 101(j) proceeds treatment are separate; business life insurance cost covers the premium side.
Hypothetical Example: Applying the Section 101(j) Analysis
This example is hypothetical, uses round figures and describes no reader's contract.
Assumptions. A C corporation owns a policy on its vice president, an officer and employee, and is the beneficiary. The contract was issued after the 2006 enactment date. Cumulative premiums total $300,000, with no other amounts paid. The death benefit is $2,000,000. The vice president dies while employed.
Scenario A: no prior written notice and consent. The vice president meets the section 101(j)(2)(A)(i) test as an employee during the 12 months before death, but without section 101(j)(4) compliance no exception is available.
- Excludable, at most: $300,000 (premiums paid)
- Not excluded: $2,000,000 − $300,000 = $1,700,000
Scenario B: notice and consent completed before issuance. The same exception applies and the notice-and-consent requirements were met, so the section 101(j)(1) cap does not apply.
- Excludable, if no other limit applies: $2,000,000
- Not excluded by reason of section 101(j): $2,000,000 − $2,000,000 = $0
In both scenarios, section 264(a)(1) allows no deduction for the $300,000 of premiums, because the corporation was directly a beneficiary. Actual results depend on the specific facts of the contracts involved.
Professional Coordination for EOLI Arrangements
An EOLI arrangement touches three areas at once: the income-tax treatment of proceeds under section 101(j), annual reporting under section 6039I on Form 8925, and contract-level documentation of notice and consent. Each is a separate question, and section 264(a)(1) premium treatment is a fourth, so they are usually reviewed together.
A qualified tax professional typically examines whether a contract meets the section 101(j)(3) definition, whether an exception fits, and whether the documentation satisfies section 101(j)(4). Legal counsel is commonly involved in drafting notice and consent documents and in reviewing the buy-sell agreement or deferred compensation plan the policy funds. Insurers' forms, procedures and timing for notice and consent vary from insurer to insurer and are confirmed with the insurers involved. State insurance rules also vary by state.
How these rules apply to a particular contract needs individual review of the contracts involved by the insurers and a qualified tax professional.
We're Here for You
We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
What is an employer-owned life insurance contract under federal tax law?
Under section 101(j)(3), it is a life insurance contract owned by a person engaged in a trade or business that is directly or indirectly a beneficiary, covering someone who is an employee on the issue date. Notice 2009-48 excludes a sole proprietor's policy on his or her own life (A-3) and a contract owned by an entity's owner (A-1).
Can an employer take out a life insurance policy on an employee?
Section 101(j) is a rule about the tax treatment of the death benefit. Under section 101(j), the employer's exclusion of the death benefit is capped at premiums and other amounts paid unless an exception applies and written notice and consent were obtained before issuance. Insurance rules on insurable interest and related matters vary by state.
Are death benefits from employer-owned life insurance taxable to the employer?
Under section 101(j)(1), the exclusion generally cannot exceed the premiums and other amounts the policyholder paid, so any excess is not excluded from gross income. The cap is lifted only when a section 101(j)(2) exception applies and the section 101(j)(4) requirements were met.
What are the exceptions under section 101(j)(2) that allow the full death benefit to be excluded?
Section 101(j)(2)(A) covers an insured who was an employee during the 12 months before death, or who at issuance was a director, a highly compensated employee or a highly compensated individual. Section 101(j)(2)(B) covers amounts paid to family, designated beneficiaries, their trusts or the estate, or used to buy an equity, capital or profits interest in the policyholder from them. Each requires notice and consent.
What is Form 8925 and who must file it?
Form 8925 is the IRS return for the reporting section 6039I requires of every applicable policyholder owning employer-owned contracts issued after August 17, 2006. It covers employee counts, insured employee counts, insurance in force, policyholder details and whether a valid consent exists for each insured employee, for each year the contracts are owned.
Does section 101(j) apply to contracts issued before August 2006?
Generally no; Notice 2009-48 states that section 101(j) applies to contracts issued after August 17, 2006, except for a contract issued after that date in a section 1035 exchange for a contract issued on or before that date. A material increase in the death benefit or other material change causes a contract to be treated as new, which depends on the contract's history.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.