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A Bevy Of Tax Issues Surface

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The Association for Advanced Life Underwriting is applauding the Senate Finance Committee for extending by one year the effective date of a nonqualified deferred compensation proposal currently pending in the committee.

Bob Plybon, president of the Falls Church, Va.-based AALU, says the deferred compensation provision will now apply to amounts deferred in taxable years beginning after Dec. 31, 2004.

“AALU has been working hard in favor of making the effective date fully prospective to allow orderly amendment of existing plans, and we are optimistic that the House will adopt a similar effective date,” Plybon says.

Plybon notes that two NQDC proposals are pending in the House and Senate. The House proposal, he says, would limit the times at which distribution from plans are permitted, require deferral elections to be made before the year in which services are performed, and prohibit provisions securing payment of deferred compensation upon a change in the employers financial health.

The proposal also would limit the use of foreign trusts, Plybon says.

Meanwhile, he says, the Senate proposal would, in addition, limit the investment choices available to participants and repeal existing statutory rules prohibiting the Treasury Department from issuing guidance on NQDC.

AALU, Plybon says, continues to urge adoption of the House version.

Meanwhile, Plybon says the industry is awaiting proposed IRS regulations and guidance on life insurance valuation for 412(i) pension arrangements and other contexts.

The IRS action will likely consist of 4 parts, says AALU. One will be a proposed regulation that will deal with the valuation of life insurance policies distributed from qualified plans, says AALU.

The other 3 parts, AALU says, will involve revenue rulings or guidance that deal with Section 412(i), qualified plan operational rules and the income tax treatment of life insurance distributions.

Plybon says that while the portion of the package consisting of the proposed regulations will be prospective in nature, the rest may have some degree of retroactive application.

While some parts of the guidance, he adds, may be largely a reinforcement and reiteration of existing rules and how they are applied, other parts may contain a significant revision to the rules regarding the valuation of life insurance.

This could generate controversy, Plybon says, and could call for a sharply focused input from AALU.

AALU also is concerned, Plybon says, about a provision in the Bush administrations fiscal year 2005 budget relating to incentives for charitable giving. The administrations proposal contains a number of provisions that appear in the Charitable Giving Act, which has been pending in some form in the House and Senate since 2001, he notes.

Of the incentives contained in the proposal, Plybon says, the one of particular interest to AALU members would permit tax-free lifetime distributions from both regular and Roth individual retirement accounts to certain charities.

Specifically, he says, individuals would be allowed to exclude from gross income distributions made after age 65 from IRAs directly to a qualified charitable organization.

However, Plybon says, in a significant, but unexplained change from prior versions of the Act, the administrations plan would not apply the exclusion to indirect gifts through a split interest entity, such as a charitable remainder trust or pooled income fund, or through the purchase of a charitable gift annuity.

He says AALU will continue to monitor the situation.

In other news, the House Financial Services Committee is unlikely to consider optional federal chartering of insurance companies this year, says a senior committee member.

Rep. Richard Baker, R-La., who chairs the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, reportedly told an industry group that he expects the committee to consider a more incremental approach but one that deals with industry concerns over speed-to-market and regulatory uniformity.

According to sources attending the meeting, Rep. Baker said that while there will be more hearings on insurance regulation, he does not expect the committee to present a discussion draft of legislation until close to year-end.

But he reportedly said he believes state insurance commissioners should continue to be the ones on the front lines of insurance regulation and consumer protection, rather than the federal government.

However, one source said he left open the possibility of considering a life insurance-only OFC plan.

Jack Dolan, a spokesman for the American Council of Life Insurers, says an incremental approach is not the way to go for the life insurance industry.

“We need comprehensive reform,” Dolan says, “and the entire life insurance industry supports reform.”

There also is some concern that class-action reform legislation, S. 2062, one of the industrys highest legislative priorities this year, may become ensnarled in the Senates procedural labyrinth.

The legislation, which would establish federal court jurisdiction over many major national class actions in which damages total at least $5 million, has 62 votesenough to overcome a filibusterthanks to a bipartisan agreement worked out before Christmas.

But it now appears opponents of S. 2062 may try to attach non-germane amendmentsrelating to the minimum wage or unemployment insurancethat could derail the bill.

It is not clear how this will play out, Dolan says, but the hope is that Senate Majority Leader Bill Frist, R-Tenn., will be able to either prevent these “poison pills” from being attached to S. 2062 or reach a compromise that will allow the legislation to advance.

At this point, Dolan says, ACLI remains cautiously optimistic the bill will reach the Senate floor soon for a final vote and that the outcome will be positive.

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 13, 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.


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