Industry Lines Up Against Savings Proposal In The Bush Budget
The life insurance industry continues to oppose the Bush administrations proposal to establish Lifetime Savings Accounts, despite the contribution limit being reduced to $5,000.
Frank Keating, president of the American Council of Life Insurers, says that the average citizen is in a position to put between $1,000 and $2,000 annually in a savings vehicle.
So whether the contribution limit for an LSA is $5,000 or $7,500, as it was in the original design, most people will move their savings from long term to short term, Keating says.
He says that while ACLI supports many aspects of the Bush administration fiscal year 2005 budget relating to retirement savings, there is a disagreement on LSAs.
Keating says he hopes to use the budget deliberations to launch a discussion on the need for long-term savings.
Indeed, Keating says, ACLI would like to see the administration establish a national commission on long-term savings.
He says he would like the discussion to include annuitization, adding that encouraging long-term savings and annuitization of retirement savings should be a healthy part of the debate.
David Woods, CEO of the National Association of Insurance and Financial Advisors, Falls Church, Va., says NAIFA also opposes LSAs.
“In our opinion, LSAs are very bad public policy that will actually be harmful to long-term savings, and, of course, they will wipe out the market for most annuities and permanent life insurance,” he says.
An LSA would allow all individuals to contribute up to $5,000 annually to a savings account, earn tax-free interest and withdraw the money at any time for any purpose without penalty.
In addition to LSAs, the administration is proposing to create a simplified retirement savings vehicle called a Retirement Savings Account.
RSAs would, in effect, replace both Roth and traditional Individual Retirement Accounts.
Individuals could contribute up to $5,000 annually into an RSA and earn tax-free interest. Distributions from an RSA would be tax free after age 58 or in the event of death or disability.
The administration also is proposing simplifying the rules for employer-based savings plans. In effect, 401(k) and similar plans would be consolidated into a new vehicle called Employee Retirement Savings Accounts, which would have simpler nondiscrimination rules.
Turning to other issues, the administration also is seeking elimination of the current moratorium on issuing guidance on nonqualified deferred compensation plans.
Treasury says the moratorium, enacted in 1978, restricts its ability to respond effectively to arrangements designed to allow individuals to avoid current income for compensation that is, in practice, readily accessible.
Since enactment of the moratorium, Treasury says, deferred compensation arrangements have become increasingly aggressive, in large part because of the prohibition on issuance of new guidance to deal with aggressive techniques.
Treasury says these aggressive arrangements include those in which the limitations of an individuals access to the compensation are not substantial.
In addition, Treasury says, some arrangements limit creditor access to assets through certain restrictions or payout provisions, or through the use of offshore funding vehicles.
The Treasury request effectively follows a NQDC provision currently pending in the Senate Finance Committee.
The House Ways and Means Committee is considering a different NQDC proposal that would affirmatively acknowledge rabbi trusts and provide Treasury with specific instructions relating to future guidance.
Also in the budget, the administration is proposing permanent repeal of Section 809 of the tax code.
Section 809, which was suspended for 3 years in 2002, seeks to tax a portion of the policyholder dividends paid by mutual companies.
The portion is determined through a complicated formula that takes into account the earnings of stock companies.
Treasury says Section 809 has never achieved its purpose effectively and has become less relevant in recent years because of a significant number of demutualizations.
Keating says that ACLI supports 809 repeal but also will push for repeal of Section 815 of the tax code.
Section 815 taxes policyholder surplus accounts established by stock companies between 1959 and 1984, when life insurance taxation was significantly changed. Since then, PSAs have been frozen, but insurance companies can still be taxed on distributions under certain circumstances.
On the health side, the administrations budget calls for a variety of new tax incentives for the purchase of health insurance and long term care insurance.
For example, the administration is calling for a $1,000 per adult and $500 per child tax credit for the purchase of health insurance by individuals and families not covered by an employer plan.
The credit would be phased out for single taxpayers earning $30,000 per year or families earning $60,000 per year.
In addition, the administration backs an above-the-line deduction for the purchase of long term care insurance and high deductible health insurance premiums in conjunction with a Health Savings Account.
Finally, the administration again is calling for permanent extension of the provisions of the 2001 tax act, most of which are set to expire on Dec. 31, 2010. This includes permanent repeal of the estate tax.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 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.