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Retirement Savings House Bill Readied

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Reps. Rob Portman, R-Ohio, and Ben Cardin, D-Md., are expected to introduce legislation this week that would increase the incentives for retirement savings and possibly include a provision encouraging retirees to purchase annuities.

The main thrust of the long-expected legislation is to build on the Portman-Cardin bill of the last Congress, which increases the contribution limits to 401(k) and similar plans and allows older workers to make additional “catch up” contributions.

But sources tell National Underwriter that the new Portman-Cardin legislation will also contain a provision creating a tax incentive for retirees with qualified plans to receive their retirement funds through a “lifetime income option.”

Although details were still sketchy at press time pending formal introduction of the legislation, sources say the provision will allow retirees to receive a certain percentage of their retirement income on an annual basis from an annuity, which would be taxed at a rate lower than the current individual rate.

However, sources say, the precise tax rate on annuities had not been determined by press time.

The provision appears to be a variation of a proposal long supported by the life insurance industry, called Lifetime Annuity Payouts, that would tax annuity payouts at the capital gains rates, as opposed to the higher individual rate.

Industry representatives declined to comment on the new Portman-Cardin bill until it is formally introduced.

In other news, legislation strongly supported by the life insurance industry reforming the class-action legal system is advancing in the U.S. Senate.

The Senate Judiciary Committee at press time was preparing to approve S. 274, legislation which would give federal courts jurisidiction over major class-action lawsuits.

Jack Dolan, a representative of the American Council of Life Insurers, Washington, says that reform of the class-action system is long overdue.

The legislation, he says, is aimed at curbing problems posed by a few bad actors.

Many insurance companies, Dolan says, are concerned that even their most innocent actions will be challenged in court by some trial lawyers.

Moreover, Dolan says, some state courts hearing major class-action lawsuits impose their own local rules nationally, regardless of the insurance codes or regulations of other jurisdictions.

Under the legislation, U.S. District Courts would have jurisdiction over any class action in which the amount in controversy exceeds $2 million and in which any member of the class of plaintiffs is a citizen of a different state from any defendant.

This is intended to resolve one of the major complaints raised by critics of the current system, which is that some local state courts that allegedly favor plaintiffs have become the primary venues for class-action lawsuits and impose huge costs on defendants nationwide.

In addition to federal court jurisdiction over class actions, S. 274 would establish a so-called “class-action bill of rights” aimed at protecting the interests of some plaintiffs who are brought into class actions with little or no notice.

These include judicial review of noncash settlements, protection against loss by class members because of payments to class counsel, standardize settlement notification information and a prohibition on discriminatory settlements that provide higher payments to certain plaintiffs located in close geographic proximity to the court.

On corporate-owned life insurance, a U.S. District Court in Michigan ruled that the Internal Revenue Service improperly disallowed deductions for interest and expenses associated with the purchase of pre-1996 COLI policies.

The court found that a pre-1996 leveraged COLI transaction was in compliance with legal standards and resulted in deductible interest payments.

The court rejected IRS arguments to the contrary.

In a 140-page decision, the court entered a judgment in favor of Dow Chemical for more than $22 million plus interest.

According to the court, Dow established by a preponderance of the evidence that its COLI policies, which were underwritten by Great West and MetLife, have economic substance.

Loans related to the COLI policies, the court adds, were real transactions consistent with commercial norms, and thus were not factual shams.

Nor was any phantom interest paid on any portion of the policy loans in the first year of the policies.

There was no basis, the court says, for requiring the recharacterization of some of the policies as group insurance.

Dow, the court says, had an insurable interest under Michigan law in the lives of all the employees covered under the policies, and they satisfied the definition of “insurance” under state law for purpose of Internal Revenue Code Section 7702(a).

However, the court did disallow certain deductions regarding withdrawals made on the policies.

According to the court, the unencumbered cash value in the policies at the beginning of the fourth year through the seventh year was zero.

Since there was nothing available to withdraw or to offset against the premium obligation, the partial withdrawals were not real and thus constituted shams in fact.

Reproduced from National Underwriter Edition, April 7, 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.