Congressional efforts to secure more than $3.2 trillion in new revenue by rolling back financial services industry tax benefits could be realized if advisors don’t make their voices heard on Capitol Hill next year.
That was the overriding theme of a Legislative Forum at the 2014 Career Conference and Annual Meeting of the National Association of Insurance and Financial Advisors, held in San Diego September 6-8. A highlight of the three-day gathering, the general session brought together NAIFA’s 9-member government relations team to explore industry threats. Among them: a myriad of tax reform proposals, SEC and DOL fiduciary standards under consideration, and additional state-imposed regulations.
Something to cheer
The general session kicked off on a positive note with an update on legislation in the making since 2013 — NARAB II — that would streamline agent licensing across state lines.
“We have good news to share: NARAB II is included in both the House and Senate versions of legislation that must be done by end of year so that the Terrorism Risk Insurance Act—TRIA—is reauthorized,” said Jill Hoffman, NAIfA’s assistant vice president of government relations. “So our chances for success are very good.”
The National Association of Registered Agents and Brokers Reform Act of 2013 (H.R. 1155), a bill introduced into the House during the 113th Congress, is intended to reduce insurers’ regulatory costs of complying with multiple states' licensing requirements. NARAB would establish independent qualifications for membership in the organization. Thereafter, NARAB member-producers licensed to do business in their home state would pay a fee to each additional state where they wish to do business.
Though the legislation looks like a done deal, implementation of the act could hit some snags. Scott Sinder an outside counsel for NAIFA at Steptoe & Johnson, noted that the president will appoint NARAB’s 13-member board of directors, including 8 state regulators and 5 non-regulators, the latter potentially including (or not) industry representatives.
“We’ll want a seat on the board,” said Sinder. “Our goal will be to ensure that [NARAB’s] executive director understands our pieces of the business, how they operate and what we need from the licensure process.
“We’ll want to make certain the qualifications are good for our members and in sync with FINRA registration requirements,” he added.
Agents and brokers will need to mindful, too, of provisions of the bill that could prevent them from operating across state lines. These include a 10-day “look-back" period during which a regulator could seek to block (subject to NARAB’s approval) a producer’s license. Licensing applicants will also be subject to a criminal background check.
The Legislative Forum then turned to a perennial issue for NAIFA members: taxation of the tax-favored treatment of life insurance, as well as of other protection and financial savings vehicles near and dear to the industry. The topic is especially of concern now because Congress is expected to take up a debate on tax reform in 2015. And north of $3.2 trillion in so-called tax expenditures are at stake.
Diane Boyle, vice President of federal government relations, outlined a laundry list of products that could get the axe under the Taxation Expenditures Report, issued by Congress’ Joint Committee on Taxation. The biggest of these include tax benefits connected with employer health and long-term care premiums ($785.1 billion), capital gains/long-term dividends ($632.8 billion) and 401(k)/other defined contribution plans ($399 billion).
Life insurance and annuity inside build-up ($158.1 billion), traditional IRAs ($69.5 billion), Roth IRAs (30.2 billion), accident/disability income insurance ($21.3 billion) and group term life insurance ($16.8 billion) add another $295.9 billion to the mix.
“The industry has a tremendous amount at stake,” said Boyle. “Policymakers scan [the JCT] list for ways to pay for comprehensive tax reform, lower tax rates, reduce the federal deficit, simplify the tax code or pay for other policy decisions.”
The last is not just a hypothetical. In June, she noted, the Senate Finance Committee unveiled a plan to pay for the Federal Highway Trust Fund, including almost $4 billion to be secured by clamping down on tax-advantaged “stretch IRAs.” After lobbying by NAIFA and sister organizations, the Senate removed the stretch IRA provision from legislation on the trust fund.
She noted that about a third of Americans have no retirement savings, including almost 70 percent of 18- to 29-year-olds. Also, nearly half (46 percent) of middle market consumers don't own individual life insurance.
Boyle added the industry’s products are particularly attractive targets as additional sources of revenue because they collectively account (including 5 of the top 10) for nearly 45 percent of all tax expenditures.
“Other [non-financial services] tax expenditures are much easier to understand than ours, putting our industry at a greater risk,” said Boyle. “This is why it's so important for us to continually educate policymakers against making changes that would burden families and businesses and hurt the economy. Industry unity has been and will be our key to success.”
To that, she added, NAIFA joined the Secure Family Coalition, which has enabled the association to develop educational resources and draw on the talents of the other coalition partners. NAIFA's distinguishing contribution to the group effort: its ability to connect all 535 members of Congress with a NAIFA member/constituent.
NAIFA’s grassroots campaign to remove industry products from Congress’ crosshairs is already yielding benefits. Danea Kehoe, an outside counsel for NAIFA at DBK Consulting, said House tax writers have decided not to tax inside build-up—the cash value component of permanent life insurance policies. But she warned that sentiment on Capitol Hill could swing against the industry after a new Congress takes office in January of next year.
To achieved a simplified tax code and lower income tax rates—primary aims of the Camp tax reform discussion draft—Congress might tax benefits on corporate owned life insurance (COLI) and deferred acquisition costs (DACs), the latter of which require insurers to spread over 10 years deductions taken on commissions paid to producers. Potential targets also include insurer policy reserves and dividends-received deductions (DRDs).
Other proposals in the discussion draft could harm clients and policyholders, said Kehoe. These include changes to transfer for value rules and repeal of non-qualified deferred compensation rules in IRC Section 409(a). The proposals encompass also changes to taxation of charitable giving and a surcharge on wealthy Americans receiving employer-provided health insurance and other benefits.
The Camp-envisioned assault on the current Internal Revenue Code doesn’t end there. Nearly $225 billion in tax advantages for retirement savings vehicles could be repealed, frozen or modified. The list includes:
- a 50 percent reduction in pre-tax contributions to defined contribution plans;
- a 10-year inflation index freeze on defined plan contribution limits for 10 years;
- Repeal of traditional IRAs, SEP/SIMPLE 401(k) plans, and of Affordable Care Act tax credits for small businesses; and
- Modification of rules for inherited IRA distributions.
“It's highly unlikely that this tax reform bill would pass in its entirety,” said Judi Carsrud, NAIFA’s director of federal government relations. “But these provisions could be a source of revenue for other, unrelated legislation. This makes it necessary for us to continue to educate lawmakers on the need for savings, easier and simpler retirement plans, and access to financial advice.”
DOL, SEC fiduciary rules
Turning to the Department of Labor’s proposed fiduciary standard, Carsrud warned that the DOL’s the re-drafted rule (expected to be released after January of 2015) may prohibit commission-paid advisors from offering advice to retirement account holders. The reason: The DOL believes that advisors compensated by a third-party, including registered reps paid through a broker-dealer, are “conflicted;” and that rep-provided advice, education or recommendations are “adverse to the client.”
The DOL, she added, has refused to meet with industry representatives. The department has also failed to schedule meetings with lawmakers to discuss the proposed rule.
“Our concerns remain that the DOL...will again write a rule prohibiting all but fee-based advisors from offering services, even if the advice offered by a registered rep or another advisor is in the best interest of the account holder,” said Carsrud. “The DOL needs to slow down and get it right.”
Respecting another fiduciary rule under consideration, an SEC uniform standard of care for investment advisors and broker-dealers, the outlook appears brighter. Gary Sanders, NAIFA’s vice president of securities and state government relations, said the SEC’s four commissioners are now evenly split on whether to propose a rule. Absent consensus, the commission is unlikely to move forward.
“The odds of the SEC eventually proposing a rule are probably a tiny bit less than they were a few months ago,” said Sanders. “Our message, though, remains the same: The SEC should not hurt the very investors they're trying to protect. And it's better to get the rule right, rather than doing it fast.”