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Stock Insurers Would Gain Long-Sought Tax Relief In Bill

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Stock Insurers Would Gain Long-Sought Tax Relief In Bill


Stock life insurers would gain a major legislative victory and substantive tax savings through a provision added to business tax legislation that Congress was seen as passing before it recessed.

Sources say the provisions passage is expected to lead to a major merger and acquisition activity in the stock life industry as companies seek to take advantage of the 2-year window to escape a tax triggered only by a change in control.

The bill was approved by a conference committee last Wednesday and the House last Thursday. Anger by some senators, mostly Democrats, because a provision mandating regulation of the tobacco industry by the Food and Drug Administration was not attached to a title of a bill giving a huge buyout to tobacco farmers was expected to delay, but not kill, action on the bill in that body. Congress was planning to leave last Friday, but the battle over the FDA provision is expected to keep the Senate in session partly through the weekend.

Ultimately, however, the Senate Republican leadership is expected to have the votes to pass the bill.

Moreover, the White House, after voicing some concerns earlier, is now signaling that it will accept the measure as reported out of the conference committee, removing another huge obstacle.

The provision would suspend for 2 years, 2005 and 2006, a tax on policyholder surplus accounts imposed by legislation enacted in 1984 and codified in Sec. 815 of the tax code. The tax is usually only a bookkeeping entry of surplus accrued before 1984, and is only triggered through a change in control.

“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is that Congress is finally taking care of a 20-year-old provision that never raised much revenue and is clearly outdated,” said Laurie Lewis, chief tax counsel at the American Council of Life Insurers. 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 industry; currently that has dropped to 10%.

The legislation also contains a provision sought by the life insurance industry that would codify establishment of nonqualified deferred compensation plans, so-called rabbi trusts. They are so named because the private letter ruling issued by the IRS to sanction them involved a retirement plan for a rabbi.

The provision is in the FSC/ETI bill (foreign sales corporation/extraterritorial income exclusions) that contains a number of tax breaks for businesses. It constitutes a coup for life insurers because Rep. Bill Thomas, chairman of the House Ways and Means Committee, had opposed granting the life industry any relief from the provision despite several years of lobbying. However, Thomas, chairman of the conference committee dealing with the bill, included the provision in the draft compromise he presented to the conference committee. The 815 provision was only in 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, there was no objection to adding the provision to the bill by any of the conferees.

Regarding the nonqualified compensation plans, the industry was concerned that Congress, under political pressure because similar programs had been used to give expansive retirement benefits to insiders at such firms as Enron, might unfairly restrict sale of a profitable and legitimate insurance product because most rabbi trusts are funded by corporate-owned life insurance. Congress has been working for 2 years to develop language restricting their use, according to ACLIs Lewis. “As a result,” she said, “the industry has been working to make sure the final language would not adversely affect our ability to sell these products.”

Lewis explained that 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 so-called “investor control” provisions that say employers can only provide a menu of investment choices to executives that are also found in the benefit plans of all employees. That also concerned the industry, an industry official said.

Under the arcane scoring rules used by the Joint Tax Committee to determine the cost of tax cuts to the government, the cost of phasing out Sec. 815 is listed as $533 million over 10 years. The cost for the first 2 years is $78 million and $54 million, respectively, a total of $132 million.

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

Insurers that could be expected to benefit from the provision include Cigna, Citigroup, Aetna, Hartford, UnumProvident, Lincoln National, Assurant (formerly Fortis), AIG and Aegon, according to industry sources.

Sam Leaman, an insurance analyst at Washington Analysis, said “given that taxes are a major consideration in merger and acquisition decisions, this will clearly provide an incentive for more M&A in the life industry over the next 2 years.” He noted that, with the exception of the Cigna/Prudential deal earlier this year, there has been little M&A activity recently in the life sector.

Mutual life insurers have been exempt from a similar tax, codified as Sec. 809, for most of the past 5 years, and won a provision in legislation passed in April that ends the tax effective in January. Mutual insurers, however, were unable to gain a provision in a middle class tax cut law passed by Congress that suspended the tax for this year, and effectively ended their lobbying for relief for this year because key members of the conference panel had signaled that enough was enough (see NU, Oct. 4).

Reproduced from National Underwriter Edition, October 7, 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.