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Groups: Governance Bill Could Hurt Split-Dollar Life

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NU Online News Service, July 24, 6:55 p.m. — Washington

Life insurance agents are urging Congress to be fair to split-dollar life insurance arrangements.

The National Association of Insurance and Financial Advisors, Falls Church, Va., and one of NAIFA’s conferences, the Association for Advanced Life Underwriting, have sent leading members of Congress a letter warning them that part of a pending corporate-governance bill might do unintended harm to split-dollar.

The letter refers to H.R. 3763, a bill that would, among other things, establish new executive compensation rules.

A House-Senate conference committee that is hammering out a consensus bill is considering a provision that would prohibit companies from making loans to their executives.

The AALU/NAIFA letter, which is signed by AALU President Albert Schiff and NAIFA President Robert Nelson, says the current version fails to give a clear description of what would constitute a “loan.”

Because the provision is so vague, enactment of H.R. 3763 could hurt split-dollar arrangements, AALU and NAIFA argue.

The letter notes that the Internal Revenue Service recently proposed regulations that treat premiums paid by an employer in connection with certain split-dollar arrangements as “deemed loans” for tax purposes. The IRS now taxes the arrangements as loans.

The letter adds that split-dollar arrangements are different from personal loans to executives, because split-dollar arrangements incorporate an underlying asset — a life insurance policy — that is appropriately taxed under longstanding tax code provisions.

Regardless of the economic situation of the employee and employer, the employer is protected and will receive the loan proceeds back at a set time in the future, the letter says.

The employer’s loan is not at financial risk, the letter adds.

The letter says split-dollar arrangements are well-established tools used to reduce the cost of providing life insurance protection for employees.

“As such, we do not believe that these arrangements should be covered by any proposal to address improper loans to public company directors and executives,” the letter says.

The letter asks Congress to include language in the provision that says the prohibition will not apply to split-dollar arrangements as defined in the proposed IRS regulation.

At a minimum, the letter says, the provision should not apply to any loan made before enactment of the legislation.

“The individuals, families and businesses served by members of AALU and NAIFA need to be able to rely on consistent, long-term tax rules to engage in proper estate, business, retirement and compensation planning,” the letter says. “It is very important that legislative changes be structured to avoid disrupting such long-term plans.”