IRC 101(j) Notice and Consent: Requirements, Timing, and Form 8925

To keep the full death benefit on an employer-owned life insurance policy tax-free, IRC Section 101(j) notice and consent requirements must be satisfied in writing before the policy is issued. That means telling the employee in writing that the company intends to insure their life and stating the maximum face amount, disclosing that the employer (or a related entity) will receive some or all of the proceeds, and obtaining the employee’s signed consent both to being insured and to coverage continuing after employment ends. Miss any one of these steps, and the exclusion from the company’s gross income is capped at the premiums paid; everything above that is taxed as ordinary income.

Which Policies Are Covered

Section 101(j) applies when a business that employs the insured owns the contract and is a direct or indirect beneficiary of the death benefit, and the insured is an employee of that business on the date the policy is issued.¹ The “applicable policyholder” definition also reaches related entities under the common-control and related-party rules of Sections 267(b) and 707(b)(1), so a parent company holding a policy on a subsidiary’s employee is inside the rules.²

The provision applies only to contracts issued after August 17, 2006. Older policies are grandfathered unless a material change resets that status, covered further down.

The Three Written Items Required Before Issuance

All three items have to be completed before the contract is issued. A policy placed even a day before the paperwork is signed can lose the full exclusion.³

Written Notice of Intent and Maximum Face Amount

The employer must notify the employee in writing that it intends to insure the employee’s life, and the notice must state the maximum face amount for which the employee could be insured at the time the contract is issued.¹ That figure can be a dollar amount or a multiple of salary, but it has to reflect what the company reasonably expects to purchase over the employee’s tenure.³ A generic statement that the employee “may be covered” does not meet the requirement.

Written Disclosure That the Employer Is a Beneficiary

The employee must be told in writing that the employer, or a related entity, will receive some or all of the death benefit.¹ The employee needs to understand that their family may not receive any of the proceeds. Burying the disclosure inside a longer employment agreement invites an IRS challenge.

Written Consent to Coverage, Including After Termination

The employee must sign a written consent agreeing both to being insured and to coverage continuing after the employee leaves the company.¹ The post-termination piece is the one employers most often miss. A consent that reads “I agree to be insured” and stops there is incomplete; the employee’s acknowledgment that the policy can remain in force after separation is a separate statutory element.

Timing Rules That Trip Employers Up

A signed consent is not valid unless the related policy is actually issued within one year after the consent was signed, or before the employee terminates employment, whichever comes first.³ Collecting consents well in advance of purchasing coverage risks having them expire before the policy is placed.

If the total face amount of employer-owned coverage on a single employee later climbs above the amount stated in the original notice, additional notice and consent covering the increase must be obtained before the new coverage is issued.⁴ The original consent does not sweep in future increases.

Keep signed consents in permanent files for as long as the policy stays in force, and for a reasonable period after benefits are paid. The IRS can request them years or decades later, and the burden of proof sits with the company. A missing form means the default taxability rule applies.

The Insured Must Also Qualify

Notice and consent alone do not deliver the exclusion. The insured must fall into at least one of the following categories at the time the contract is issued:¹

An employee at any point during the 12 months before death, which covers recent retirees and departures.
A director of the company on the issuance date.
A highly compensated employee, meaning a 5-percent owner or an employee with compensation above the inflation-adjusted threshold. For 2026, that threshold is $160,000. Section 101(j) uses the Section 414(q) definition but disregards the top-paid group election.⁵⁶
A highly compensated individual, meaning one of the five highest-paid officers, an owner of more than 10 percent of the employer’s stock, or someone among the highest-paid 35 percent of all employees. Section 101(j) substitutes 35 percent for the 25 percent used elsewhere.⁷

Status is locked at the issuance date. A 5-percent owner who later sells out keeps the policy’s eligibility; a rank-and-file employee later promoted into a highly compensated role does not gain it retroactively. Payroll and ownership records from the year the policy was placed are what defend those classifications in an audit.

Proceeds Paid to Family, an Estate, or a Buy-Sell

A separate exclusion applies regardless of the insured’s employment status, as long as notice and consent were done. Proceeds are excluded to the extent they are paid to a member of the insured’s family, a designated beneficiary other than the employer, a trust for those individuals, or the insured’s estate.¹ The same exception covers proceeds the company uses to buy back the insured’s ownership interest from the heirs or estate, which is the common buy-sell structure for closely held businesses. Notice and consent still have to be in place before issuance for this exception to apply.

Fixing an Inadvertent Failure

The IRS has a narrow safe harbor for compliance mistakes. If the employer maintained a formal system for providing notice and collecting consents, the failure was genuinely inadvertent, and the error is discovered and corrected no later than the due date of the tax return for the year the policy was issued, the IRS will not challenge the exclusion.⁴ A company with no system that finds the problem years after issuance does not qualify. The relief is for employers who took the obligation seriously and missed a name in a batch of hires.

Electronic Notice and Consent

Electronic notice and consent are permitted under Notice 2009-48 if the system meets four conditions: the employee receives the same information the employer sent, the system verifies the identity of the employee accessing it, there is a method for formally recording consent, and the employer can produce a hard copy on IRS request.⁴ Whatever platform is used, the records need to remain accessible and reproducible for the full life of the policy.

Grandfathered Policies and What Counts as a Material Change

Contracts issued on or before August 17, 2006, are not subject to Section 101(j) and need no notice and consent forms. Grandfathered status is lost, however, if the company makes a material increase in the death benefit or another material change; the policy is then treated as newly issued and every requirement applies.⁴

Notice 2009-48 lists changes that are not material: automatic death benefit increases from the normal operation of the contract or from Section 7702 compliance when the insurer’s consent is not required, increases from applying policyholder dividends to buy paid-up additions, death benefit fluctuations from investment performance in a variable contract, routine administrative updates, transfers between general and separate accounts, and the exercise of options or riders that existed at original issuance. A deliberate employer-driven increase beyond what the contract provides for automatically is material. For master contracts covering multiple lives, adding a new insured is treated as issuing a new contract only for that person, not for those already covered.⁴

Annual Form 8925 Reporting

Every business that owns one or more employer-owned life insurance contracts issued after August 17, 2006, has to file Form 8925 each year any such policy remains in force. It is attached to the company’s income tax return and reports:⁸

Total number of employees at year-end.
Number of insured employees under employer-owned policies.
Aggregate face amount of insurance in force at year-end.
Whether valid consent exists for every insured employee, and if not, how many lack consent.

The form is short, but the numbers reported have to be supported by the consent records collected when each policy was issued.³ Skipping the filing, or reporting figures the company cannot back up, weakens its position if the IRS later questions whether a death benefit qualifies for exclusion.

1
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
2
Legal Information Institute. 26 USC 101(j)(3) – Employer-Owned Life Insurance Contract
3
Internal Revenue Service. Form 8925 – Report of Employer-Owned Life Insurance Contracts
4
Internal Revenue Service. Notice 2009-48 – Treatment of Certain Employer-Owned Life Insurance Contracts
5
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
6
Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules
7
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
8
Office of the Law Revision Counsel. 26 USC 6039I – Returns and Records With Respect to Employer-Owned Life Insurance Contracts