Recently Enacted Pension Protection Act Establishes New COLI Rules

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (Pub. L. No. 109-280) (the "Act") which imposes new restrictions on employers wanting to benefit from certain tax advantages on corporateowned life insurance, commonly referred to as COLI. The new rules are effective as of August 17 and apply to COLI policies issued or materially changed after that date.

In the past, the payments of death benefits on COLI policies were generally not taxable to employers. Under the new rules, however, death benefits on COLI policies can still receive tax-free treatment, but only if an employer: (1) limits coverage to certain individuals; (2) obtains the informed consent of such individuals; and (3) annually reports to the Internal Revenue Service and keeps records regarding its COLI policies. If these conditions (outlined below) are not satisfied, the Act limits the tax-free treatment of death benefits to the sum of the premiums and other amounts paid by the employer