IRS Form 8925: Filing Requirements, Notice and Consent, Penalties

If your business owns a life insurance policy on an employee and would collect any part of the death benefit, you must attach IRS Form 8925 to your income tax return every year that policy stays in force. The form reports how many employees are insured under employer-owned contracts issued after August 17, 2006, the total death benefit in force, and whether every insured employee gave valid written consent before the policy was issued. It is short. The compliance work that stands behind it is not, and the cost of skipping that work is measured in the taxability of the eventual payout, not in a filing penalty.

Who Has to File

The filing obligation falls on any “applicable policyholder”: a person or business engaged in a trade or business that owns a life insurance contract on an employee and is directly or indirectly a beneficiary under that contract.¹ The insured has to have been an employee on the date the policy was issued. Entity type doesn’t matter. Corporations, partnerships, LLCs, and sole proprietorships all file if they hold qualifying policies.

You don’t have to be the only beneficiary. Any direct or indirect beneficial interest in the proceeds is enough. Key-person coverage, buy-sell arrangements funded by life insurance, and similar setups where the company would collect on an employee’s death all fall inside the rule.

Only contracts issued after August 17, 2006, count. Older policies sit outside the requirement unless something happens to pull them back in (see material changes below). For every tax year a qualifying contract is in force, Form 8925 goes with your return.² Filing continues until the policy is surrendered, lapses, or pays out.

The Notice and Consent Step That Has to Happen First

Before the insurer issues the policy, the employer has to clear two hurdles: written notice to the employee and the employee’s written consent. Do either one after the policy is already in force and the death benefit loses its favorable tax treatment. This step is where most compliance failures start, and it can’t be fixed retroactively once the insured has died.³

The written notice has to tell the employee three things:

The employer intends to insure the employee’s life.
The maximum face amount for which the employee could be insured at the time the contract is issued.
The employer will be a beneficiary of any proceeds paid on the employee’s death.

The employee then signs a written consent agreeing to be insured and acknowledging that coverage can continue after employment ends.¹ The Form 8925 instructions add a shelf life: the consent expires if the policy isn’t actually issued within one year of the signature, or before the employee leaves the company, whichever comes first.⁴ If underwriting drags, you may need a fresh consent.

The IRS offers limited relief for good-faith errors. If the policyholder made a genuine effort to satisfy the rules, the failure was inadvertent, and the mistake is discovered and corrected by the due date of the tax return for the year the contract was issued, the exception still holds.³ A total failure to obtain written consent cannot be cured after the insured has died.

What Goes on the Form

Start with the policyholder’s legal name and taxpayer identification number. For most businesses that’s the EIN. A sole proprietor without employees may use a Social Security number.⁴

Four substantive lines follow:

Line 1 asks for the total number of employees at the end of the tax year. Entire headcount, not just insured workers.
Line 2 asks how many of those employees are insured under employer-owned contracts issued after August 17, 2006.
Line 3 asks for the total dollar amount of insurance in force at year-end for the Line 2 employees. Add the death benefits across all qualifying policies.
Line 4a asks whether you have valid written consent from every insured employee reported on Line 2. If the answer is no, Line 4b asks how many are missing valid consent.

Line 4b is the one to watch. A “no” on 4a paired with a count on 4b tells the IRS that some of your policies may not qualify for the full exclusion. It doesn’t produce an immediate penalty. It does create a record that will matter when a claim is paid.⁴

How and When to File

Form 8925 is never filed by itself. It attaches to the policyholder’s income tax return for each year the qualifying contracts are in force.² Which return depends on entity type: Form 1120 for corporations, Form 1065 for partnerships, and Form 1040 for sole proprietors. The deadline is the due date of that underlying return, extensions included.

If the return is filed electronically, Form 8925 goes with it as part of the electronic submission. There is no separate e-filing rule for the form. It follows whatever method you use for the return it accompanies.

When an Old Policy Gets Pulled Back In

Contracts issued on or before August 17, 2006, are generally outside both the Section 101(j) rules and Form 8925 reporting. That protection ends if the policy undergoes a “material change.” Once that happens, the IRS treats the policy as a new contract: notice and consent requirements apply, and annual Form 8925 filing begins.⁴

The IRS has said several routine adjustments do not qualify as material changes:³

Death benefit increases required by Section 7702 to keep the contract classified as life insurance.
Paid-up additions bought with policyholder dividends.
Administrative housekeeping such as address updates or payment-method changes.
Switches between general and separate accounts within the same contract.
Exercising an option that was built into the original contract.

Voluntarily increasing the death benefit beyond what the contract requires, or fundamentally altering the policy structure, does trigger material-change treatment. If you hold older policies and are thinking about modifications, get a clear answer on whether the change will strip the grandfather status before you sign. Adding covered lives under a master contract is treated as a new contract only for the added individuals, not the existing insureds.

What Non-Compliance Actually Costs

There is no separately listed penalty in Section 6039I for failing to file Form 8925 itself. The enforcement mechanism sits upstream and is far more severe. If the notice and consent requirements under Section 101(j) aren’t met, the death benefit exclusion collapses. Instead of receiving the entire payout tax-free, the employer can only exclude an amount equal to the premiums and other amounts it paid for the contract. Everything above that is taxable income.¹

Form 8925 is the documentation that shows you met the rules. Without it, the IRS has no annual record of your compliance, and you are in a weak position to defend the exclusion if the question comes up during an audit. The filing itself is easy; what it stands in for is not.

One boundary worth naming: satisfying notice and consent is a threshold, not the whole test. The full exclusion also requires that the insured fit one of the categories in Section 101(j) (such as being an employee within 12 months of death, a director, or a highly compensated employee at issuance) or that proceeds go to the insured’s family, estate, designated beneficiary, or a trust for those parties.¹ Meeting notice and consent gets you to the door. It doesn’t decide by itself whether the payout is tax-free.

Records You Need to Keep

You must keep records sufficient to support everything reported on Form 8925: the signed consent forms for each insured employee, the written notices you provided, and the documentation behind your employee counts and total insurance in force. Retention runs as long as the contents could be relevant to the administration of any tax law, which in practice means the life of the policy and well past it.⁴

The signed consents are the single most important document in the file. If an insured dies and the IRS questions the exclusion, that signature is your proof. Losing it years later because someone cleared out a filing cabinet is the kind of mistake nobody sees coming until it costs real money.

1
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
2
eCFR. 26 CFR 1.6039I-1 – Reporting of Certain Employer-Owned Life Insurance Contracts
3
Internal Revenue Service. Notice 2009-48 – Treatment of Certain Employer-Owned Life Insurance Contracts
4
Internal Revenue Service. Form 8925 – Report of Employer-Owned Life Insurance Contracts