Industry Vows A Vigorous Fight Against COLI Restrictions

Section 809 is an add-on tax imposed on mutual life insurance companies based on the earnings of stock companies. It dates back to 1984 and was intended to assure that mutual companies and stock companies are taxed based on their respective segments of the market.

Section 815 dates back to 1959 and requires stock companies to maintain policyholder surplus accounts comprising one-half of the underwriting income received between 1959 and 1984.

These accounts are subject to tax following certain events, such as dissolution of the company.

As for consolidated returns, current law imposes several restrictions on life insurers. First, life insurers must be part of an affiliated group for at least five years before they can be included in a consolidated return.

Second, nonlife companies must be members of the group for five years before their net operating losses can be used to offset income of a life insurance affiliate.

Third, the life insurance affiliate can offset only 35% of its income with the net operating losses of a nonlife affiliate.

In addition to COLI, the Finance Committee approved two provisions relating to nonqualified deferred compensation (NQDC).

First, the committee called for repeal of the current limitation on the issuance of Treasury Department guidance on NQDC.

According to committee documents, repeal of the current limitation is intended to empower the Treasury Secretary to issue guidance on NQDC arrangements that improperly defer income.

In particular, the documents say, the Secretary should address a limitation under the constructive receipt doctrine in which an individuals right to receive compensation is limited in form but not in fact.

In addition, the documents say the Secretary should address arrangements that purport not to be funded but should be treated as funded.

Finally, the documents say, the Secretary should address arrangements in which assets appear to be subject to the claims of an employers general creditors but as a practical matter are unavailable.

Second, the committee adopted language aimed at eliminated alleged abuses regarding rabbi trusts.

The committee documents note that since rabbi trusts were developed, arrangements have evolved that attempt to protect the assets from creditors and effectively allow deferred amounts to be immediately available to individuals.

Under the language adopted by the committee, all amounts deferred under a rabbi trust will be includible in gross income to the extent those amounts are not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are satisfied.

Specifically, distributions from a rabbi trust will be allowed only upon separation of service, death, a specified time, or a change in control occurrence of an unforeseeable emergency or disability.

In addition, a rabbi trust may not permit acceleration of distributions.

Due to the closure of the federal government and other related events surrounding Hurricane Isabel, which was scheduled to hit the Washington, D.C., area right at press time, National Underwriter was unable to get industry feedback on the NQDC provisions.

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.