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Life Health > Life Insurance

Bill Tax Provision Could Spur Life M&A Activity

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Stock life insurers may have won big tax savings through a provision added Monday to a bill being revised by a House-Senate conference committee.[@@]

The provision would suspend for 2 years, 2005 and 2006, a tax on policyholder surplus accounts imposed by Section 815 of the Internal Revenue Code. Because the tax, enacted in 1984, is usually only a bookkeeping entry and is triggered only when insurers go through changes in control, industry officials believe a 2-year suspension of the tax could lead to a wave of mergers and acquisitions involving life insurers with stock company charters.

“The real key about the suspension provision is that Congress is finally taking care of a 20-year-old provision that never raised much revenue and is clearly outdated,” says Laurie Lewis, chief tax counsel at the American Council of Life Insurers, Washington. It was added to the tax code in 1984 as a means of balancing the competitive interests of mutual and stock life insurance companies. But, at the time, mutuals controlled 55% of the market. Mutuals now control only 10% of the market.

The legislation also contains a provision sought by the life insurance industry that would codify establishment of the non-qualified deferred compensation plans known as “rabbi trusts.” The trusts are so named because the private letter ruling issued by the Internal Revenue Service to permit the use of rabbi trusts involved a retirement plan for a rabbi.

The provision is contained in the “chairman’s mark” of H.R. 4520, the foreign sales corporation and extraterritorial income exclusions bill. The provision constitutes a coup for life insurers because Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, had opposed granting the life industry any relief from the provision despite several years of lobbying by the industry. But, in this case, Thomas is chairman of the conference committee dealing with H.R. 4520. It was at his request that the provision was agreed to, although the provision was taken from the Senate version of the bill. Given that “there were no questions or comments when the suspension of Section 815 was described” during the reading of the committee print, according to a report by an industry lobbyist, the provision is unlikely to be touched as negotiations on the bill proceed.

Congress is racing to adjourn by Friday in order to campaign, so work on the final bill is expected to be completed soon.

Several roadblocks remain, however. One is that some Democrats are insisting that a title in H.R. 4520 dealing with buyouts of tobacco farmers include a provision mandating oversight of the tobacco industry by the U.S. Food and Drug Administration. Republicans are supposedly balking at such a provision.

Moreover, the Bush administration, through a letter to the conference committee by Treasury Secretary John Snow, voiced concern that the bill might be used as a vehicle to benefit corporate special interests, a no-no before a tight election. Industry officials, however, pointed out that the letter did not threaten a veto. And Thomas has tried his best to ensure that the bill is revenue-neutral.

Regarding the non-qualified investment plans, the insurance industry was concerned that Congress, under political pressure because similar programs had been used to give expansive retirement benefits to insiders at firms such as Enron Corp., Houston, might unfairly restrict the sale of a profitable and legitimate insurance product, because most rabbi trusts are funded with corporate-owned life insurance. Congress has been working for 2 years to develop language restricting use of the plans, according to Lewis. “As a result,” she says, “the industry has been working to make sure the final language would not adversely affect our ability to sell these products.” Lewis says the industry “was successful in winning appropriate language in areas where we sought to have impact.”

As a result, the final language “provides statutory protections for plans that fit within the new provisions.”

Moreover, the final language deletes an “investor control” provision that would have allowed employers to offer investment choices to executives only if benefit plans offered the same choices to other employees. That provision also concerned the industry, an industry official says.

Analysts at the Joint Tax Committee estimate the cost of phasing Section 815 out would be $533 million over 10 years. During the first 2 years, the cost would be $132 million, the analysts predict.

“During the years that you have this suspension, companies can engage in transactions that might reduce their existing Section 815 accounts to such an extent that the revenue loss might extend beyond 2 years,” Lewis says.

Several large, well-known financial services companies carry more than $100 million in Section 815 tax liability on their books, according to industry officials.

CIGNA Corp., Philadelphia, could save $150 million in taxes stemming from its sale of its retirement business to Prudential Financial Inc., Newark, N.J., and sources say Citigroup Inc., New York, has about $237 million in Section 815 tax liabilities on its books related to Primerica.

Representatives for CIGNA and Citigroup were not immediately available to comment on the Section 815 issue.

Mutual life insurers have been exempt from a similar tax, set out in Internal Revenue Code Section 809, for most of the past 5 years, and they won a provision in legislation passed in April that ends the tax for 2005 and later years. That provision will take effect in January 2005. Mutual insurers, however, were unable to obtain a provision in a middle-class tax cut bill passed by Congress last week that would have suspended the tax for 2004.

The general purpose of H.R. 4520 is to end sanctions imposed by the World Trade Organization on U.S. exports to Europe. The WTO imposed the sanctions in connection with a WTO ruling stating that current U.S. tax laws designed to promote exports constitute illegal subsidies.

Congressional leaders are making passage of H.R. 4520 a priority because many members of Congress say it will create American jobs. Because passage of H.R. 4520 is such a high priority, members of the conference panel are using it as a vehicle for dealing with other tax issues.

Links to the text of the bill and more information about the bill are on the Web at


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