Report Says 1986 Grandfather Rule For COLI Should Be Terminated
A report produced by the Congressional Joint Committee on Taxation says the grandfather clause applicable to pre-June 20, 1986, corporate-owned life insurance policies should be terminated.
“If the 1986 grandfather rule was intended to provide transition relief to businesses that had purchased life insurance contracts before the 1986 date, sufficient time has passed that a redeployment of such businesses assets could have been possible,” the report says.
“The grandfather rule can no longer serve any reasonable need for transition relief,” the report says.
The 2,700-page JCT report focuses on the bankruptcy of Enron Corp. and addresses allegations that Enron executives abused executive compensation rules.
The report touches on the use of life insurance, although life insurance represents a relatively small aspect of the overall document.
Nonetheless, the report offers some recommendations regarding life products which could become the basis for legislation.
In addition to recommending repeal of the COLI grandfather provision, the report calls for elimination of the moratorium on the Treasury Department issuing guidelines on non-qualified deferred compensation plans.
The report also says Congress should consider whether rabbi trusts are appropriate for deferred compensation and whether the rules relating to such arrangements should be tightened.
As for split-dollar life insurance, the report does not recommend Congressional action. Rather, it notes that Treasury has already issued proposed regulations that require the inclusion in income of the value of the economic benefit received by the employee under a split-dollar arrangement.
“This guidance provides clear rules and should be finalized expeditiously,” the report says.
Albert J. “Bud” Schiff, president of Stamford, Conn.-based NYLEX Benefits and president of the Association for Advanced Life Underwriting, Falls Church, Va., says there is a principle involved in the COLI grandfather issue.
When people make long-term decisions, he says, they should be able to rely on the tax rules at the time of purchase.
Prospective changes are one thing, Schiff says, but it is a problem to go back and tamper with long-term commitments, some of which are irrevocable.
Where there are abuses, there are ways of dealing with them, he adds, but retroactively changing the rules will tend to undercut the publics faith that the tax rules in effect when long-term life insurance arrangements are entered will continue for the life of those arrangements.