Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance

Enron Casts Shadow On Split-Dollar Life

Your article was successfully shared with the contacts you provided.

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.

The legislation contains an exclusion from what is known in legal circles as the “collateral source rule.” Generally, the collateral source rule means that compensatory payments made to those who are victims of someone elses liability should not be reduced by the amounts the victims receive from other sources, such as their own life or health insurance.

The theory is that those who purchase insurance should not be treated differently from others as a result of their own prudence.

However, the victims compensation fund legislation passed after Sept. 11 contains an exclusion from this general rule for those who received payments from life insurance or pensions.

The legislation reduces the victims compensation payments by the amount received under life insurance policies and pensions.

This treatment does not apply to other collateral sources, such as inheritances.

David Winston, vice president of government affairs for NAIFA, says it is “fundamentally wrong” to penalize people who have chosen to protect their families and plan for their financial security.

Indeed, he says, the provision turns the collateral source rule on its head.

He notes that the provision involving life insurance and pensions was placed in the legislation without notice or debate.

Winston says that Congress has long recognized the wisdom of purchasing life insurance and other related products. However, he says, the provision in H.R. 2926 reducing victims compensation payments to those who received life insurance proceeds damages the foundation of life insurance.

Finally, NAIFA joined the American Benefits Council, Washington, in urging Congress to proceed carefully before imposing new restrictions on 401(k) plans following the Enron collapse.

NAIFA signed on to testimony by ABC President James A. Klein urging Congress to carefully consider the implications of such proposals as arbitrarily limiting black-out periods and capping the percentage of company stock that can be invested in an individuals 401(k) plan.

(ABC represents a wide spectrum of plan sponsors and administrators.)

Klein says that caps on company stock would discourage employers from making generous contributions to 401(k) plans because it is more expensive to match contributions in cash than in stock.

As for black-out periods, Klein says, they are a necessary part of plan administration and often done to improve service or investment options.

Reproduced from National Underwriter Life & Health/Financial Services Edition, March 11, 2002. Copyright 2002 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.

Copyright 2002 by The National Underwriter Company. All rights reserved. Contact Webmaster


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.