To amend the Internal Revenue Code of 1986 to exclude from gross income the proceeds from certain company-owned life insurance.

Summary: COLI Best Practices Act of 2005 - Amends the Internal Revenue Code to limit the tax exclusion for benefits paid by employer-owned life insurance contracts upon the death of an insured employee, with certain exceptions for directors and highly compensated employees and for proceeds paid to the heirs of an insured employee. Requires employers to provide written notice to employees of intent to insure their lives and obtain written consent from such employees to being insured under a company-owned life insurance contract.

Imposes certain reporting and recordkeeping requirements for employer-owned life insurance contracts.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``COLI Best Practices Act of 2005''.

SEC. 2. TREATMENT OF DEATH BENEFITS FROM CORPORATE-OWNED LIFE 
              INSURANCE.

    (a) In General.--Section 101 of the Internal Revenue Code of 1986 
(relating to certain death benefits) is amended by adding at the end 
the following new subsection:
    ``(j) Treatment of Certain Employer-Owned Life Insurance 
Contracts.--
            ``(1) General rule.--In the case of an employer-owned life 
        insurance contract, the amount excluded from gross income of an 
        applicable policyholder by reason of paragraph (1) of 
        subsection (a) shall not exceed an amount equal to the sum of 
        the premiums and other amounts paid by the policyholder for the 
        contract.
            ``(2) Exceptions.--In the case of an employer-owned life 
        insurance contract with respect to which the notice and consent 
        requirements of paragraph (4) are met, paragraph (1) shall not 
        apply to any of the following:
                    ``(A) Exceptions based on insured's status.--Any 
                amount received by reason of the death of an insured 
                who, with respect to an applicable policyholder--
                            ``(i) was an employee at any time during 
                        the 12-month period before the insured's death, 
                        or
                            ``(ii) is, at the time the contract is 
                        issued--
                                    ``(I) a director,
                                    ``(II) a highly compensated 
                                employee within the meaning of section 
                                414(q) (without regard to paragraph 
                                (1)(B)(ii) thereof), or
                                    ``(III) a highly compensated 
                                individual within the meaning of 
                                section 105(h)(5), except that `35 
                                percent' shall be substituted for `25 
                                percent' in subparagraph (C) thereof.
                    ``(B) Exception for amounts paid to insured's 
                heirs.--Any amount received by reason of the death of 
                an insured to the extent--
                            ``(i) the amount is paid to a member of the 
                        family (within the meaning of section 
                        267(c)(4)) of the insured, any individual who 
                        is the designated beneficiary of the insured 
                        under the contract (other than the applicable 
                        policyholder), a trust established for the 
                        benefit of any such member of the family or 
                        designated beneficiary, or the estate of the 
                        insured, or
                            ``(ii) the amount is used to purchase an 
                        equity (or capital or profits) interest in the 
                        applicable policyholder from any person 
                        described in clause (i).
            ``(3) Employer-owned life insurance contract.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `employer-owned life insurance contract' means 
                a life insurance contract which--
                            ``(i) is owned by a person engaged in a 
                        trade or business and under which such person 
                        (or a related person described in subparagraph 
                        (B)(ii)) is directly or indirectly a 
                        beneficiary under the contract, and
                            ``(ii) covers the life of an insured who is 
                        an employee with respect to the trade or 
                        business of the applicable policyholder on the 
                        date the contract is issued.
                For purposes of the preceding sentence, if coverage for 
                each insured under a master contract is treated as a 
                separate contract for purposes of sections 817(h), 
                7702, and 7702A, coverage for each such insured shall 
                be treated as a separate contract.
                    ``(B) Applicable policyholder.--For purposes of 
                this subsection--
                            ``(i) In general.--The term `applicable 
                        policyholder' means, with respect to any 
                        employer-owned life insurance contract, the 
                        person described in subparagraph (A)(i) which 
                        owns the contract.
                            ``(ii) Related persons.--The term 
                        `applicable policyholder' includes any person 
                        which--
                                    ``(I) bears a relationship to the 
                                person described in clause (i) which is 
                                specified in section 267(b) or 
                                707(b)(1), or
                                    ``(II) is engaged in trades or 
                                businesses with such person which are 
                                under common control (within the 
                                meaning of subsection (a) or (b) of 
                                section 52).
            ``(4) Notice and consent requirements.--The notice and 
        consent requirements of this paragraph are met if, before the 
        issuance of the contract, the employee--
                    ``(A) is notified in writing that the applicable 
                policyholder intends to insure the employee's life and 
                the maximum face amount for which the employee could be 
                insured at the time the contract was issued,
                    ``(B) provides written consent to being insured 
                under the contract and that such coverage may continue 
                after the insured terminates employment, and
                    ``(C) is informed in writing that an applicable 
                policyholder will be a beneficiary of any proceeds 
                payable upon the death of the employee.
            ``(5) Definitions.--For purposes of this subsection--
                    ``(A) Employee.--The term `employee' includes an 
                officer, director, and highly compensated employee 
                (within the meaning of section 414(q)).
                    ``(B) Insured.--The term `insured' means, with 
                respect to an employer-owned life insurance contract, 
                an individual covered by the contract who is a United 
                States citizen or resident. In the case of a contract 
                covering the joint lives of 2 individuals, references 
                to an insured include both of the individuals.''.
    (b) Reporting Requirements.--Subpart A of part III of subchapter A 
of chapter 61 of such Code (relating to information concerning persons 
subject to special provisions) is amended by inserting after section 
6039H the following new section:

``SEC. 6039I. RETURNS AND RECORDS WITH RESPECT TO EMPLOYER-OWNED LIFE 
              INSURANCE CONTRACTS.

    ``(a) In General.--Every applicable policyholder owning 1 or more 
employer-owned life insurance contracts issued after the date of the 
enactment of this section shall file a return (at such time and in such 
manner as the Secretary shall by regulations prescribe) showing for 
each year such contracts are owned--
            ``(1) the number of employees of the applicable 
        policyholder at the end of the year,
            ``(2) the number of such employees insured under such 
        contracts at the end of the year,
            ``(3) the total amount of insurance in force at the end of 
        the year under such contracts,
            ``(4) the name, address, and taxpayer identification number 
        of the applicable policyholder and the type of business in 
        which the policyholder is engaged, and
            ``(5) that the applicable policyholder has a valid consent 
        for each insured employee (or, if all such consents are not 
        obtained, the number of insured employees for whom such consent 
        was not obtained).
    ``(b) Recordkeeping Requirement.--Each applicable policyholder 
owning 1 or more employer-owned life insurance contracts during any 
year shall keep such records as may be necessary for purposes of 
determining whether the requirements of this section and section 101(j) 
are met.
    ``(c) Definitions.--Any term used in this section which is used in 
section 101(j) shall have the same meaning given such term by section 
101(j).''.
    (c) Conforming Amendments.--
            (1) Paragraph (1) of section 101(a) of such Code is amended 
        by striking ``and subsection (f)'' and inserting ``subsection 
        (f), and subsection (j)''.
            (2) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 of such Code is amended by inserting 
        after the item relating to section 6039H the following new 
        item:

``Sec. 6039I. Returns and records with respect to employer-owned life 
                            insurance contracts.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to life insurance contracts issued after the date of the 
enactment of this Act, except for a contract issued after such date 
pursuant to an exchange described in section 1035 of the Internal 
Revenue Code of 1986 for a contract issued on or prior to that date. 
For purposes of the preceding sentence, any material increase in the 
death benefit or other material change shall cause the contract to be 
treated as a new contract except that, in the case of a master contract 
(within the meaning of section 264(f)(4)(E) of such Code), the addition 
of covered lives shall be treated as a new contract only with respect 
to such additional covered lives.