Dead Peasant Insurance Walmart: Tax Shelter Evolution and Reform

Dead peasant insurance was a type of life insurance policy that was taken out on employees without their knowledge or consent, often as a benefit for their employers.

Walmart was one of the largest users of this practice, with over 1,200 policies issued to its employees.

This practice allowed employers to claim tax deductions on the premiums paid for these policies, which could be substantial.

The policies were often used to pay out death benefits to the employers, rather than the employees' families.

The Internal Revenue Code (IRC) has a specific provision dealing with life insurance benefits paid due to the death of the insured.

Death benefits are usually excluded from the taxable income of the beneficiary, which is why they're often referred to as tax-free.

In the past, the IRC prohibited the deduction of premiums paid for life insurance when the premium payor was also the beneficiary of the death benefit.

This rule was put in place to prevent individuals from deducting premiums on life insurance policies they're also the beneficiary of.

Loans from insurers secured by policy values are not considered income, and earnings credited to an owner's policy values are also not taxed.

In the 1980s, tax shelters were a big deal, and one type of shelter was broad-based leveraged COLI transactions. These transactions allowed employers to purchase life insurance on hundreds or thousands of employees, producing tax savings on interest deductions in excess of the actual cost to the employer.

The IRS deemed these transactions to be "tax shelters", and they were exploited by businesses seeking to pay for insurance on employees/shareholders on a deductible basis. A corporate employer would purchase policies on masses of lower-level employees, sometimes without their knowledge or consent.

The IRS ultimately won court cases against several leveraged COLI investors, including Camelot Music, Winn-Dixie, American Electric Power, and Dow Chemical. The IRS also settled tax cases with other investors on a basis mostly favorable to the IRS.

Here are some key dates in the evolution of tax shelters:

In the 1980s, tax shelters became a concern due to the exploitation of the 4 out of 7 test by businesses.

The introduction of a $50,000 cap per insured in 1986 led to the creation of broad-based leveraged COLI transactions, which were deemed tax shelters by the IRS.

These transactions involved corporate employers purchasing life insurance policies on hundreds or thousands of employees, often without their knowledge or consent.

The policies would remain in place even after the employee quit or retired, and when an insured employee died, the company would receive the death benefits, leaving the employee's family with a small portion of the proceeds or nothing.

In the 1990s, the IRS started to crack down on leveraged COLI investors, winning court cases against companies like Camelot Music, Winn-Dixie, American Electric Power, and Dow Chemical.

The IRS also forced other investors to settle their tax cases on terms mostly favorable to the agency. This led to Congress amending the Internal Revenue Code several times to clarify the prohibition on borrowing to fund insurance acquisitions and to deny tax-free death benefits to corporate employers in certain situations.

The COLI Best Practices Act was adopted in 2006, requiring employers to comply with new rules to maintain the tax-free nature of death benefits and tax deferral on earnings credited to policy value.

Corporate-owned life insurance is a type of life insurance that businesses purchase on their employees, with the company itself named as the beneficiary. This type of insurance is typically used to safeguard the company's financial interests in various situations where the loss of key personnel would have significant effects.

It's commonly purchased for specific purposes such as key person life insurance, buy-sell agreements, split-dollar life insurance, and funding retirement and compensation plans. The company pays the premiums, and the death benefit is usually tax-free.

While COLI can be written on multiple employees, it's not commonly purchased for an entire workforce but rather key individuals critical to the company's success. Most basic group life insurance policies, on the other hand, are offered to employees as part of their employment benefits.

There are four main variations of permanent insurance that include an investment component: whole life, universal life, variable life, and whole life insurance. Whole life insurance combines life insurance with an investment component, providing tax-deferred savings benefits.

Here are some key purposes of corporate-owned life insurance:

Companies can purchase life insurance policies on their employees for various purposes. These policies are typically used to protect the company's financial interests in case of the loss of key personnel.

Corporate-owned life insurance (COLI) is a type of life insurance that businesses purchase on their employees, with the company itself named as the beneficiary. Companies can purchase COLI for specific purposes, such as key person life insurance, buy-sell agreements, split-dollar life insurance, and funding retirement and compensation plans.

Companies may purchase life insurance on their executives or key employees to protect against financial losses. This type of employer-owned policy is not known as dead peasant insurance but is sometimes called key person insurance.

Companies must meet specific IRS requirements to enjoy tax benefits from COLI policies. Employees must receive written notice that their employer intends to purchase a policy, and the employee must consent.

Here are some key requirements for companies to receive tax benefits from COLI policies:

Only employees who were employed within 12 months before their death, or who were directors, highly compensated, or major stakeholders at the time the policy was issued, are subject to these requirements.

The controversy surrounding dead peasant insurance at Walmart is a complex issue with deep roots in both legal and ethical concerns. The company was found to have purchased life insurance policies on approximately 350,000 employees nationwide.

In some states, like Texas, the law requires employers to have a legitimate financial interest in the employee's life to justify a corporate-owned life insurance policy. Walmart was found to not have this interest in most cases.

Tribunals have issued several rulings against Walmart, highlighting the company's lack of legitimate interest in the lives of low-level employees, making the policies inappropriately and potentially illegal in some states.

The company eventually stopped contracting new policies in 1995 and canceled all existing ones in 2000, but the issue continued to spark public outcry and lawsuits.

Dead peasant insurance is not the same as an employer-subsidized group life insurance policy, which is simply an employee benefit similar to employer-subsidized health insurance.

Employees consent to an employer-subsidized life insurance policy and choose the beneficiary, unlike dead peasant insurance, where the company purchases the policy without the employee's knowledge and is the only beneficiary.

Corporations that purchased dead peasant insurance were likely attempting to benefit from a tax loophole, but in some cases, companies may have a legitimate interest in purchasing life insurance on an essential employee to help the company stay afloat or transition in the event of an unexpected death.

This type of employer-owned policy is not known as dead peasant insurance but is sometimes called key person insurance, which is purchased on executives or other key employees.

In the 1980s and 1990s, many large companies, including Walmart and Winn-Dixie, purchased life insurance policies on tens of thousands of low-level employees, but today, virtually no corporations within the United States have dead peasant insurance policies due to federal law eliminating the tax benefits.