NAIFA And AALU Protest Call For Repeal Of COLI Grandfather Rule

By

Washington

Nothing in the legislative history of the Tax Reform Act of 1986 indicates that a grandfather rule applied to pre-June 21, 1986, corporate-owned life insurance policies was intended to be temporary, two life insurance associations say.

In a joint statement sent to the Senate Finance Committee, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors say that to the contrary, the grandfather rule was intended and drafted to be permanent.

The statement was signed by Albert J. “Bud” Schiff and Richard A. Koob, presidents of AALU and NAIFA, respectively.

The statement is in response to a report issued recently by the staff of the Joint Committee on Taxation calling for repeal of the grandfather rule, saying it is no longer needed to provide “transition relief.”

Schiff tells National Underwriter that the groups thought it was essential to voice their vigorous objections to the recommendation.

“It would be terrible tax policy and very unfair to retroactively reverse legislation that has been relied on for approximately two decades,” Schiff says.

In its report, the JCT staff says the grandfather rule is no longer needed.

“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,” JCT staff says.

“The grandfather rule can no longer serve any reasonable need for transition relief,” the report concludes.

But AALU and NAIFA say the tax-writing committees were well aware of the distinction between a permanent grandfather rule and a temporary transition rule, and could have adopted the latter if that had been their intention.

Moreover, in 1996, Congress “went out of its way” to reconfirm the 1986 grandfather rule, the groups say.

“Ten years after adoption of the original 1986 grandfather, Congress believed that grandfather continued to have merit and specifically protected pre-June 21, 1986, policies from the new 1996 rule denying interest deductions for life insurance policy loans,” AALU and NAIFA note.

The associations note that the JCT staff report came in the wake of an investigation of alleged executive misconduct at Enron.

Part of the investigation involved charges that Enron executives benefited unfairly from pre-1986 COLI policies.

However, the associations say, nothing in the JCT staffs report suggests nor could it suggest that Enron acted inconsistently with Congressional intent in borrowing against pre-June 21, 1986 life insurance policies.

“If Enron did not abuse current law with respect to its policy borrowings, those borrowings should not be a rationale for reconsidering a grandfather rule included in legislation nearly two decades ago,” AALU and NAIFA say.

“The sins of Enron did not extend to its life insurance policy borrowings and certainly do not serve as justification for enacting punitive tax increases on law-abiding corporations,” they add.

The associations say repeal of the grandfather rule would create significant hardships. Indeed, they say, taxpayers would be left with several bad alternatives.

To cope with repeal, taxpayers may have to suffer a significant tax increase because of the loss of interest deductions.

Alternatively, AALU and NAIFA say, taxpayers may sell other assets to raise funds to pay off the life insurance policy loans, but this could cause companies to sell assets they otherwise consider necessary to their business operations.

This could also result in additional tax from built-in gains, they say.

Another alternative is to replace the life insurance policy borrowings with other interest-deductible borrowings, they say.

However, the associations continue, these replacement borrowings would have adverse financial statement consequences by increasing the companies reported leverage and would restrict their ability to make further borrowings for business operations.

Finally, AALU and NAIFA say, companies could surrender sufficient portions of the life insurance policies to satisfy the indebtedness.

However, they add, this would cause immediate taxation of accrued inside buildup of the life insurance policies.

The associations say the JCT staff has asserted no justification for repeal. Basic principles of equity dictate that Congress not eliminate a grandfather rule that has been in place for nearly two decades, they add.

In other news, the American Association of Health Plans is urging presidential candidates to address the underlying causes of the health care cost crisis.

While not directly addressing the proposal by Rep. Richard Gephardt, D-Mo., to eliminate President Bushs proposed tax cuts in order to fund a $210 billion per year universal health insurance program, AAHP says any reform plans must address cost drivers.

“Spending more money will undeniably give more Americans access to health care in the short term,” says AAHP President Karen Ignagni.

“But until candidates also commit to address and mitigate destructive drivers of health care costs, such as frivolous litigation, costly and unnecessary mandates, and fraud and abuse, we will not be able to make the system affordable or guarantee the quality and effectiveness of the American health system” she says.


Reproduced from National Underwriter Edition, April 28, 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.