Industry Dismayed Over Treasurys Final Rule On Split-Dollar

By

Washington

The life insurance industry is expressing dismay over the Treasury Departments decision to promulgate a final rule on split-dollar life insurance arrangements without granting an extension of the current safe harbors.

“Frankly, we are surprised and disappointed at these regulations,” says Frank Keating, president of the American Council of Life Insurers, Washington.

He says that under the new rules, employees covered under split-dollar life insurance arrangements will be taxed not only on the value of the current life insurance protection, but also on the policy cash value.

This, Keating says, is contrary to the basic tax rules for life insurance. The regulations also are puzzling, Keating says, because they interfere with the employer-employee relationship.

“Typically, the split-dollar life insurance policy arrangement is the result of a negotiation between the two sides,” Keating says. “And Congress has repeatedly promoted the provision of life insurance to employees.

“It doesnt seem very wise to be upsetting appropriate, long-held regulations that many companies and employees rely on,” he says.

In addition to promulgating the rule, Treasury rejected a request from the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both of Falls Church, Va., to extend the current safe harbors relating to split-dollar arrangements to Dec. 31, 2004.

Instead, the safe harbors will expire Dec. 31, 2003.

Due to a confluence of events (including the NAIFA annual meeting, a Senate Finance Committee markup of a major tax bill and an approaching hurricane) National Underwriter was unable to connect with representatives of AALU prior to press time.

However, in a formal statement presented to Treasury during consideration of the regulation, AALU and NAIFA questioned Treasurys legal authority to tax the cash value of split-dollar arrangements.

They noted that under Section 72 of the Tax Code, the investment element of cash value life insurance is not taxable until cash is actually accessed. The regulation, they say, is inconsistent with Section 72 and therefore must be viewed as an invalid attempt to tax this value.

“While it should be recognized that the Treasury would be warranted in claiming a degree of meaningful discretion in the promulgation of split-dollar rules, that discretion does not include a direct disregard of statutory mandates, nor does it include efforts to undercut the policy thrust of such mandates,” AALU and NAIFA said.

Under the final rules, split-dollar arrangements will be taxed under one of two regimes.

If the executive owns the policy, the employers premium payments will be treated as loans to the executive and the executive will be taxed on any difference between the actual interest on the loan and market-rate interest.

If the employer owns the policy, the premiums are treated as providing taxable economic benefits to the executive, including the policy cash value.

In other news, ACLI is praising the Securities and Exchange Commission for extending the comment period on proposed changes to National Association of Securities Dealers Conduct Rules that ACLI believes could have an unfair effect on limited service broker/dealers.

The SEC extended the comment period to Oct. 3, 2003. Under the proposed NASD changes, the comment period would have expired on Sept. 3, 2003.

Carl B. Wilkerson, chief counsel for securities and litigation with ACLI, says the SEC showed good judgment in extending the comment period. The proposed changes, he says, are important and merit thorough consideration.

The original 21-day comment period in the NASDs proposal, he says, was inadequate, especially for large organizations and trade groups.

The issue involves a series of supervisory changes proposed by NASD in the wake of a recent scandal in which the branch manager of a full service broker/dealer misappropriated millions of dollars in customer funds over a 15-year period.

The proposed changes are aimed at upgrading oversight of branch offices and other locations.

Among the changes proposed by NASD are annual inspections of branch offices and periodic inspections of nonbranch offices and designation of one or more principals to establish, maintain and enforce a system of supervisory control policies and procedures.

These procedures, NASD says, must be reasonably designed to review and supervise the customer account activity conducted by sales managers.

Specific activities to be reviewed include transmittal of funds or securities from customers and third-party accounts, customer address changes and changes in customer investment objectives.

Wilkerson says, however, that the NASDs proposed rules would have a severe impact on limited service broker/dealers affiliated with life insurance companies.

The abuses giving rise to the proposed changes, he notes, related to a full service broker/dealers that misappropriated customer funds.

But limited service broker/dealers affiliated with life insurers, Wilkerson says, do not pose the same risks of market conduct abuse.

These firms, he says, act as introducing brokers for variable product applications to life insurers and do not take custody of customer assets or securities.

Ongoing administration of the variable contract, Wilkerson notes, is conducted by the life insurance company, not the broker/dealer.


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