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.