Fight Goes On Over Extending Dividend Tax Cuts To Annuities
Life insurers are facing a fluid situation at press time in the effort to include annuities in legislation that reduces the taxation of dividends.
The Senate Finance Committee recently approved legislation that would reduce the taxation of dividends. At press time, the legislation, S. 1054, was pending on the floor of the Senate.
While the Senate Finance Committees reduction is much smaller than the one approved recently by the House of Representatives, the bills have one thing in common: Neither extends the reduction to variable annuities.
Sen. Rick Santorum, R-Pa., has been working to amend the Senate bill to cover annuities, but the Finance Committee did not adopt his amendment.
The effort now is to have the language adopted on the floor of the Senate as part of a broader amendment that will be offered during the debate by Sen. Don Nickles, R-Okla.
Diane Sullivan, assistant vice president for taxes with the American Council of Life Insurers, Washington, says ACLI remains hopeful that any reduction of dividend taxes will ultimately be extended to annuities.
She particularly praised Santorum for his strong efforts on behalf of annuities.
If the Senate does not accept the annuities language, the industry will still have an opportunity to get the language included in a final consensus bill that will be worked out by a House-Senate conference committee.
Sullivan says members of Congress in both the House and the Senate have expressed sympathy for the life insurance industrys position.
Under the dividend language in S. 1054, the first $500 in dividends from stocks or mutual funds would be tax-free. In addition, 10% of dividends above $500 would be tax-free, with the percentage moving to 20% in 2008.
In other tax news, the IRS has proposed a regulation on the valuation of economic benefits under certain equity split-dollar life insurance arrangements that is causing some concern in the industry but is not expected to have a major impact on the market.
The new proposal represents an extension of the proposal issued on July 9, 2002, establishing new rules on the taxation of split dollar.
The 2002 proposal calls for two mutually exclusive regimes, a loan regime and an economic benefit regime.
The loan regime generally covers the taxation of collateral assignment arrangements while the economic benefit regime largely covers endorsement arrangements.
The new proposal applies only to the economic benefit regime, in which the owner of the life insurance contract is treated as providing economic benefits to the non-owner.
The new proposal says the value of the economic benefits provided to the non-owner for a taxable year equals the cost of any current life insurance protection provided to the non-owner, the amount of policy cash value to which the non-owner has current access and the value of any other economic benefits provided to the non-owner.
Bob Plybon, president of the Association for Advanced Life Underwriting, Washington, says AALU has been meeting with Treasury Department officials on the issue of how split-dollar arrangements should be taxed. He says AALU believes the only value in equity is the value of the death benefits.
AALU is disappointed, Plybon says, that the proposed regulations take a different approach. However, he says, while AALU disagrees with Treasury philosophically, he does not believe the proposal, if adopted, would have a significant impact on the market.
He notes that the proposed regulation applies only to equity endorsement arrangements, which are not sold regularly.
Most split-dollar arrangements, Plybon says, are collateral assignment.
Laurie Lewis, chief counsel for federal taxes with ACLI, agrees. “The sky is not falling,” she says.
Lewis adds that the proposed regulations need to be analyzed and that ACLI will likely have a long list of comments and questions.
But she notes that Treasury will collect and consider comments on the proposed regulations before finalizing them.
During this process, she says, the industry will see if there is room to modify the proposal.
Treasury says comments on the proposal must be filed by July 8, 2003. A hearing on the proposal is set for July 29.
Finally, ACLI is praising the House for approving legislation that would allow life insurers and other firms that provide services to defined contribution plans to also offer investment advice to plan participants.
The legislation, H.R. 1000, allows service firms to provide advice subject to strict disclosure requirements.
ACLI President Frank Keating says that currently, plan participants are challenged to make sense of stock and bond markets that puzzle even the most learned economists.
“It is only fair that Congress help plan participants by making investment advice more accessible,” Keating says.
The American Benefits Council, Washington, an employers group, also praised H.R. 1000.
“Pension policy, with regard to company stock in retirement plans, should ensure that 401(k) participants have the information, education and professional advice necessary to exercise wisely their responsibility as savers and investors,” says Council President James A. Klein.
Similar legislation passed the House last year, but the Senate never acted on the bill.
Reproduced from National Underwriter Edition, May 19, 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.