Pension Protection Act of 2006
The Pension Protection Act (PPA) was signed into law on August 17, 2006. The stated intention of the bill was to strengthen employees' retirement security by:
- Changing defined benefit plan funding rules and imposing benefit restrictions if adequate funding levels are not maintained
- Legitimizing cash balance plans
- Encouraging use of automatic enrollment in 401(k) and 403(b) plans
- Enacting new requirements to qualify death benefits from employer-owned life insurance contracts
- Making permanent the improvements in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)
This page addresses the implications and opportunities as it relates to corporate-owned life insurance in nonqualified plans.
Corporate-Owned Life Insurance
One section of the new rules applies directly to life insurance sales in nonqualified plans and employer-owned benefit situations. Generally known as the corporate-owned life insurance (COLI) provisions, Section 863 of the bill adds new requirements that must be met in order to qualify death benefits from employer-owned life insurance contracts as tax-free. When any one of several somewhat typical fact situations are met, and if the notice and consent requirements are complied with, death benefits of employer-owned policies should retain their tax-free status for income tax purposes.
The financial services industry worked very closely with many members of Congress to codify a list of best practices in order to preserve tax-free death benefits in appropriate business situations. This creates opportunities to position the sale of nonqualified plans and other employer-owned benefits financed with life insurance products.
The following materials are intended to provide historical reference to the PPA changes.
- IRC Section 101(j) and Notice 2009-48 (10/2009) (BB10051)