Bill Clarifies Tax Treatment Of Factored Structured Settlements
Insurance companies are supporting an effort in Congress to clarify the tax treatment of structured settlements that are factored.
The legislation, H.R. 1514, would require those who want to convert their structured settlements into cash to return to the court that granted the original judgment and demonstrate that their circumstances reasonably justify factoring.
Without court permission, a factored structured settlement would be subject to a 40% excise tax.
Doug Bates, assistant vice president with the Washington-based American Council of Life Insurers, says the issue involves the special tax treatment granted to annuities issued to cover structured settlements.
Bates notes that the earnings on the annuity that cover the structured settlement are not taxable to the individual. One reason for this, he says, is to encourage the use of structured settlements to pay liability judgments.
However, he says, a practice recently emerged in which a company would purchase the stream of payments for the structured settlement from the individual in exchange for cash upfront, a process known as factoring.
However, Bates says, the tax code says that if an annuity receives preferential tax treatment, as is the case with a structured settlement, the payments cannot be accelerated.
But, he adds, there is confusion in the law about the tax treatment of a structured settlement after factoring. It is possible, Bates says, that the insurance company might be liable for any tax consequences even if the company had no knowledge of the factoring.
H.R. 1514, which is sponsored by Rep. E. Clay Shaw Jr., R-Fla., would clarify the tax consequences of factoring, Bates says.
Gretchen Schaefer, a representative of the Washington-based American Insurance Association, a major property-casualty group, says AIA also supports the legislation. Requiring a court to approve the sale of structured settlement will ultimately benefit the payee, she says.
In addition to H.R. 1514, Senate Finance Committee Chairman Max Baucus, D-Mont., is expected to add a similar provision to the Victims of Terrorism Relief Act, H.R. 2884, sources says.
Although the provision would initially be limited to structured settlements arising from the Sept. 11 terrorist attack, Sen. Baucus reportedly wants to expand it to all structured settlements.
Meanwhile, the House was preparing at press time to vote on a terrorism insurance bill that will contain a provision calling for a study of the impact of a major terrorist event on the life insurance industry.
The provision calling for the study is contained both in the main bill, now numbered H.R. 3357 (it was previously numbered H.R. 3210), and in an alternative sponsored by Rep. John LaFalce, D-N.Y., which will be considered on the House floor in the nature of an amendment.
The provision is changed slightly from the original version, which called for a five-member commission to release a study within 90 days.
The new provisions establishes a seven-member commission consisting of the following:
The Treasury Secretary or the Secretarys designee, the Federal Reserve Chairman or a designee, the Assistant to the President for Homeland Security, a representative of the National Association of Insurance Commissioners, a representative of direct underwriters, a representative of reinsurers and a representative of life insurance agents.
The report would be due 120 days after the commission is formed.
The study proposal was developed by ACLI.
David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, Falls Church, Va., says he hopes the House version of the study will be included in any final bill.
He notes that a draft proposal in the Senate, which has not yet been introduced, also calls for a study, but would be conducted internally by the Treasury Department.
Finally, as Congress struggles to develop an economic stimulus package before recessing for the year, the fate of a major insurance industry provision remains unclear.
The issue is the current tax treatment of investment income earned by foreign subsidiaries of U.S. financial services companies under Subpart F of the tax code.
The current treatment, which defers U.S. tax on this income until the parent receives it, is set to expire at the end of the year.
If it does, the income at issue will be immediately taxable to the parent.
ACLI and other financial services organizations are seeking a permanent extension of the current treatment. President Bush and Republican leaders in the House favor a permanent extension, but Baucus in the Senate supports only a one-year extension.
Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers, Washington, says the likelihood is that Congress will compromise around a two-year extension, although the industry will lobby hard for a five-year provision.
He adds that if Congress is unable to agree on a stimulus package, the industry will make a major effort to move an extenders bill, including the Subpart F provision, as a separate piece of legislation.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.