Snow Says Dividend “Accommodation” Will Be Found
Treasury Secretary John Snow says he believes the Bush administration will “find an accommodation” with the insurance industry on the issue of tax-free dividends.
The Secretary made the comment during a question-and-answer session at Congressional hearing on President Bushs tax reform and economic stimulus proposals.
One of the proposals would eliminate taxation of corporate dividends. However, as currently envisioned, it would not apply to annuities.
This is because elimination of the tax would apply only to dividends on stocks held individually or through mutual funds.
Frank Keating, president of the American Council of Life Insurers, Washington, says that this would adversely affect the life insurance industry.
Thus, he says, dividends credited to stock investments underlying an after-tax variable annuity contract should be given the same treatment.
Keating spoke during a House Ways and Means Committee hearing.
Keating says that the life insurance industry is an essential part of the economy, one that invests long term and offers products for long-term financial security.
“The life insurance industry is good for America and any fundamental tax changes should seek to strengthen, not weaken, this vital sector of the economy,” Keating says.
In his testimony, Keating also notes that the administration is proposing a variety of new tax-favored savings vehicles.
For example, one proposal vehicle would allow individuals to contribute up to $7,500 to a savings account, earn tax-free interest and withdraw the money at any time for any reason without a penalty.
In its consideration of these proposals, Keating says that Congress should carefully evaluate the potential effect of any relative weakening of incentives for individuals to save specfically for their own retirement or other long-term needs.
“We are gravely concerned that one unintended, but very real consequence of this proposal could be the weakening of the nations private pension, life, annuity, long-term care and disability insurance system,” Keating says.
“Given the looming demographic changes in the United States, it is essential that private savings for retirement and private resources for protecting against the financial burdens of death, longevity, disability and long-term illness be strengthened,” he says.
When faced with near-term realities, he adds, many working Americans find it hard to save for long-term goals.
Only an annuity, Keating says, can guarantee that an individual will receive income payments for as long as he or she lives.
Thus, he says, Congress should enact legislation that would lower the high tax rates on lifetime income payments from individual annuities and remove barriers to lifetime income payments from pension plans.
In other news, the Internal Revenue Service again confirmed that inside buildup, death benefits or cash surrender value of life insurance or annuity contracts are not tax shelters.
The comment came in Rev. Proc. 2003-25 in response to a request for clarification from the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both of Falls Church, Va.
Albert J. “Bud” Schiff, president of AALU and president of NYLEX Benefits, Stamford, Conn., says he is delighted the IRS has again confirmed that life insurance is not a tax shelter.
This, he notes, has been recognized for as long as the tax code has been around.
The genesis of the AALU/NAIFA request for clarification are proposed and temporary regulations that would generally require taxpayers to report certain transactions that could be construed as tax shelters, including transactions with a significant book-tax difference.
The regulations list a variety of items that need not be reported because the book-tax difference arises from a transaction operating as intended by the tax code.
However, life insurance was not on the original list.
Thus, AALU and NAIFA urged the IRS to include life insurance inside buildup and death benefits on the list of items for which a book-tax difference would not be reportable.
The IRS directly responded to the AALU/NAIFA request by specifically excluding inside buildup and death benefits from the category of reportable tax shelter.
Finally, ACLI is praising the introduction of legislation that would allow insurance companies and agents that provide services to a pension plan to also provide investment advice to plan participants.
The legislation, H.R. 1000, was introduced last week by Reps. John Boehner, R-Ohio, and Sam Johnson, R-Texas.
It would amend the fiduciary rules of the Employee Retirement Income Security Act to allow service firms to provide investment advice, subject to strict disclosure requirements.
“Congress needs to amend outdated ERISA provisions that bar the parties best equipped to advise employees from providing investment advice,” ACLIs Keating says.
“These are financial services firms, such as life insurance companies, that already are providing services and products to plan sponsors,” he says.
Reproduced from National Underwriter Edition, March 10, 2003. Copyright 2003 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.