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Dividend Proposal Leaves Out VAs

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The life insurance industry took a hit at the hands of Congressional tax writers when they agreed on a $350 billion tax cut that would reduce taxation on dividends but not provide parity for variable annuities.

“We are certainly disappointed that Congress did not provide tax cut parity to variable annuities,” says Jack Dolan, a representative of the American Council of Life Insurers, Washington.

The action came despite the fact that some 10 leading members of the House Ways and Means Committee signed letters during the course of the debate calling for parity for annuities.

Dolan says that annuities still enjoy strong support on Capitol Hill. While it is unfortunate that the tax conferees left annuities out of the final package, it remains high in the minds of many members that this issue must be addressed.

In the meantime, Dolan says, annuities remain the only financial product with the unique feature of a lifetime income option.

In addition, he says, annuities are tax-deferred. These powerful features, Dolan says, will continue to attract consumers.

An analysis by UBS Warburg terms the lack of parity a “moderate negative” for variable annuities that likely will reduce sales by less than 20%, perhaps in the 5-10% range.

This is due to factors mitigating the lack of parity, UBS Warburg says, including the fact that dividend and capital gains taxes would still exist and the tax bill has a sunset clause.

Under the legislation, the dividend tax cut expires in 2008.

Overall, the political wrangling surrounding the controversial tax stimulus package proved to be a mixed bag for the life insurance industry.

While the industry was disappointed with the outcome of the dividend tax issue, it scored a victory when tax writers deleted a provision from the Senate bill that would have taxed nonqualified deferred compensation plans.

Bob Plybon, president of the Association for Advanced Life Underwriting, Falls Church, Va., says AALU is very pleased with the outcome.

He says that the issue of nonqualified deferred compensation will likely be addressed again later this year.

AALU, Plybon says, hopes to work with both the House Ways and Means Committee and the Senate Finance Committee to design a provision that makes sense and not destroy a retirement vehicle that benefits not just senior executives, but middle managers as well.

The nonqualified deferred compensation provision was scored as raising between $4 and $5 billion in revenue, but many in the industry question whether it would have raised that much.

The industry scored another victory when the Senate, by a 63-37 vote, rejected a proposal by Sen. John Edwards, D-N.C., that would have taxed the proceeds of corporate-owned life insurance policies unless the policies cover key employees only.

In a statement on the floor of the Senate, Edwards said his proposal was aimed at eliminating one of the worst “tax scams” in the tax code, which involves companies getting billions of dollars in tax breaks for buying life insurance policies on janitors, secretaries and other working people.

But Sen. Jon Kyl, R-Ariz., said that the issue should not be dealt with in the context of the stimulus package. There should be an opportunity for a proper debate, he said.

Dolan says that defeat of the Edwards proposal was a good victory for the industry and may represent a recognition of the vital rule COLI plays in business planning.

He adds that the 63 votes against the Edwards proposal demonstrates strong bipartisan support for COLI.

Finally, the final tax bill does not contain industry-backed provisions repealing Sections 809 and 815 of the tax code.

Dolan notes that the repeal provisions got a strong vote in the Senate Finance Committee but were dropped in conference.

Still, Dolan says, the industry is in its strongest position ever to get 809 and 815 repealed, and ACLI is confident it will find another vehicle to do so.

Section 809 imposes an additional tax on mutual life insurance companies by reference to the earnings of stock companies.

Section 815 imposes a tax on policyholder surplus accounts held by stock companies.

In other major news, the House Judiciary Committee approved legislation reforming the class-action legal system by a 20-14 vote.

The legislation, H.R. 1115, would establish federal court jurisdiction on all class actions in which the plaintiffs are asking for at least $2 million in damages and any member of the plaintiff class is from a different state from any defendant.

In addition, the legislation would create a “class-action bill of rights” calling for standardized settlement notification, judicial review of noncash settlement and a prohibition on settlements that cause a net loss to class members due to payments to class counsel.

A similar bill, S. 274, was approved in April by the Senate Judiciary Committee. However, that bill would establish a $10 million threshold for federal jurisdiction.

In addition, the Senate bill would create a more complicated formula for federal jurisdiction based on the residency of the parties.

Dolan praises the House Judiciary Committee for its action, noting that ACLI has been working very hard on this issue.

He says the full House and Senate should act on class-action reform as soon as possible.

Each day of delay, Dolan says, is a new opportunity for abuse by some trial lawyers. The present system, he says, benefits neither business nor consumers.

Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 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.