Legislation was introduced in the House late on May 11 that would codify into federal law marketing “best practices” for sale of corporate-owned life insurance.
The bill, the “COLI Best Practices Act of 2005,” H.R. 2251, would limit sale of COLI to highly compensated employees and require the consent of those being insured.
The legislation is identical to a compromise drafted in the U.S. Senate Finance Committee in February 2004, but which failed to be enacted by the Congress, according to several industry trade groups.
The bill has strong support from these life industry trade groups, including the American Council of Life Insurers, Washington; and, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both in Falls Church, Va. There is support because the bill codifies industry best practices established by underwriters and agents and because some members of Congress were moving to shut down some of the highly profitable product.
Sale of COLI has been under fire for several years because consumer groups and even members of Congress have voiced outrage that large companies took out blanket life insurance policies on their employees without notifying the employees or allowing them to participate in the proceeds.
The IRS also refused to allow companies to not pay taxes on the inside buildup of certain policies deemed to be based on an overly aggressive interpretation of tax laws. These policies were sold in the late 1980s and early 1990s. Sales of these policies were stopped in the early 1990s when the IRS started to question them. The IRS won several cases, including two in appellate federal courts, and undertook enforcement actions against more than 100 other companies based on sales of aggressive COLI prior to 2003. But it then proposed a generous amnesty plan accepted by most of the companies involved, although the agency never disclosed how many cases were settled.
The latest bill is sponsored by Reps. Thomas Reynolds, R-N.Y., and Earl Pomeroy, D-N.D., and 27 other members of the House Ways & Means Committee– representing a majority on the panel, according to several industry trade groups.
The legislation would effectively, among other things:
==Limit coverage to directors and “highly compensated employees,” who are defined as individuals earning at least $90,000 annually or in the top 35 percent by compensation;
==Require employers to obtain the informed consent of any employee before enrolling him or her in a COLI plan; and,
==Require employers to report information about their COLI plans to the Internal Revenue Service.
“This bill is identical to COLI provisions adopted with near unanimity last year by the Senate Finance Committee and reintroduced this year. Like the Senate version, this bill enjoys strong bipartisan support in the House,” said ACLI President and CEO Frank Keating.
“It also enhances protections for employees. The bill’s sponsors and co-sponsors got it right in setting standards for employee consent,” said AALU President Roger Sutton.
“The legislation would ensure the continued viability of COLI as a business planning tool. Reps. Reynolds and Pomeroy and the other House co-sponsors deserve high praise for recognizing the value of a financial product that helps businesses meet future liabilities,” said NAIFA CEO David F. Woods. “Knowing there will be a steady stream of available capital enables employers to plan for the future, recruit and retain a highly qualified workforce, and meet tomorrow’s benefit costs. The legislation provides the confidence businesses need today to offer benefits for tomorrow.”
ACLI, AALU and NAIFA support the bill