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Loan Language May Impact Split-Dollar

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Despite industry objections, Congress agreed on executive compensation language barring personal loans to corporate executives that might affect split-dollar arrangements.

But industry representatives say they are not giving up the fight over split-dollar.

The action came in the debate over H.R. 3763, legislation that emerged in the aftermath of a series of corporate scandals and which aims to establish tougher rules on corporate accounting and executive compensation.

One provision of the bill bars personal loans to corporate executives. Of significance is the fact that H.R. 3763 is tied to the Securities Exchange Act, rather than the Internal Revenue Code.

For technical legal reasons, this creates ambiguities over split-dollar.

In a joint letter to members of Congress during the debate over the loan provision, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both in Falls Church, Va., say that the definition of a “loan” is unclear.

As a result, they say, split-dollar could be affected. The letter was signed by AALU President Albert J. Schiff and NAIFA President Robert M. Nelson.

They note the Internal Revenue Services recent proposed regulations that treat premiums paid by the employer in connection with a split-dollar arrangement as a “deemed loan” for tax purposes and taxes them under the tax code.

One industry source, who asked not to be identified, says that herein lies the ambiguity.

The provision in H.R. 3763 that bars personal loans to executives under the Securities Exchange Act does not address the issue of a “deemed loan” under the Internal Revenue Code and IRS regulations.

As a result, this source says, it is unclear whether split-dollar comes under the prohibition in H.R. 3763. This sources adds that the insurance industry will likely treat H.R. 3763 as not creating a problem for split-dollar.

In their letter, AALU and NAIFA say that split-dollar is not at all like a personal loan to an executive.

Split-dollar arrangements, they say, incorporate an underlying asset, which is 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 adds.

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

As such, the letter says, they should not be covered by any proposal to address improper loans to corporate executives.

However the ambiguity over split-dollar is resolved, it appears that the ban on personal loans to corporate executives only applies to future arrangements and will not have any retroactive impact.

However, sources said that the loan provision is very complicated and requires further analysis.

In other news, the American Council of Life Insurers, Washington, is joining forces with a large property-casualty association, the American Insurance Association in Washington, in a new effort to advance global trade in insurance.

The two associations will establish a joint strategic planning committee aimed at fostering industry unity on a variety of international trade issues expected to emerge over the next few years.

These include the continued opening of the China insurance market, future openings in Japan, India and Vietnam and international insurance regulatory developments.

“The global insurance trade policy and regulatory framework has evolved dramatically in the past five years,” says Brad Smith, ACLIs managing director for international relations.

“Having a formal, unified planning and coordination mechanism for our member companies with global operations and interests will allow us to leverage the industrys considerable resources and expertise for our members, who are increasingly looking to global operations for expansion,” Smith says.

John Savercool, vice president of federal affairs for AIA, adds that the insurance industry is extremely effective on major trade issues when it speaks with one voice.

“This formalization of the already effective AIA-ACLI collaboration will help ensure that U.S. insurers are united on their major international trade goals and objectives, a unity that will benefit the industry and allow us to make our case more effectively to U.S. trade officals and our trade partners,” Savercool says.

In addition to coordinating with U.S. trade negotiators, the two associations say they will use the new collaborative effort to strengthen longstanding relationships with overseas counterparts and the broader U.S. financial services industry.

Finally, terrorism insurance legislation that would, among other things, establish a study on the possible need for a federal backstop in the life insurance market, may finally be moving to its final stages.

After some intense political wrangling, the Senate leadership appears ready to name its members of a House-Senate Conference Committee that will develop a consensus bill.

The naming of the conferees has been stalled for several weeks both for procedural reasons and remaining skepticism among some Republicans over the extent of a federal role in the property-casualty market.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 29, 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.


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