By Steven Brostoff
Equity split-dollar life insurance came under fire on Capitol Hill recently following revelations that former Enron chairman Kenneth Lay had a large policy paid for by the now bankrupt company.
At a Senate Finance Committee Hearing, Sen. Blanche Lincoln, D-Ark., questioned whether split-dollar life insurance, which she described as a taxpayer-subsidized benefit that goes mainly to corporate executives, represents good tax policy.
In a discussion with William F. Sweetnam Jr., benefits tax counsel with the Treasury Department, Lincoln noted that Enron paid a total of $1.23 million in premiums on a $12 million split-dollar life insurance policy.
She said that Enron would be able to recoup the premium, while Lay could borrow against the policy tax-free or leave the funds to his family tax-free.
In effect, Lincoln said, split-dollar is really a tax-deferred investment wrapped in a life insurance policy, which the tax code allows and the American taxpayer pays for.
She questioned whether new Treasury Department rules on split-dollar are appropriate.
Under the new rules, split-dollar life insurance provided as an employee benefit will be subject to a new tax treatment. However, existing contracts will be grandfathered.
Sweetnam said that under the Departments new rules, equity split-dollar will be taxed. However, he said, it would be unfair to come in and completely overturn existing arrangements, which have been in effect for many years without Treasury Department guidance.
Lincoln argued that split-dollar arrangements are only available to executives. She questioned whether it is Treasurys position that this should be encouraged if it does not benefit workers and the taxpayers who provide the credit.
Sweetnam said that split-dollar is available to anyone, although he acknowledged that it is not like a qualified plan where the government requires everyone to get it.
A lot of times, he said, split-dollar is used to secure deferred compensation arrangements, which normally do not go to rank-and-file workers.
Sweetnam insisted that under the new rules, split-dollar arrangements will have clear tax ramifications.
However, he said, he does not believe Treasury will look at establishing unfavorable tax treatment of executive compensation arrangements that are not available to the rank-and-file.
In other news, the National Association of Insurance and Financial Advisors, Falls Church, Va., opposes in principle a controversial feature contained in victims compensation legislation, H.R. 2926, that was enacted in the wake of the Sept. 11 terrorist attack.