Many experts believe strong bipartisan support for the proposed COLI Best Practices Act gives it an excellent chance of passage in 2005.
This year’s version was introduced in the House on May 11, 2005, as HR 2251, COLI-BPA, with 29 of 41 House Ways & Means Committee members as co-sponsors. In the Senate, COLI-BPA was re-introduced by Senators Grassley and Baucus (S 219).
The following is an assessment of the likely impact of this legislation.
The Act would require business process changes in 4 areas: participant consent and notice forms, eligibility screening, tax reporting and record keeping.
Participant consent and notice forms. Under the proposal, life insurance death benefits received by an employer on an employee’s life would be taxable (in excess of basis) under new Internal Revenue Code Section 101(j)–unless, before policy issue, the employee: a) is notified in writing of the employer’s intent to insure the employee’s life; b) provides written consent to being insured and that the coverage may continue after the insured terminates employment; and c) is informed in writing that the employer will be a beneficiary of any proceeds payable at the employee’s death.
While many COLI firms already have incorporated consent forms into their business process, the COLI-BPA proposal will require notice forms that specify the maximum policy face amount the employee “could be insured for at the time the policy was issued.” The use of the future conditional tense (“could be”) may raise issues for aggregate funded plans where the client has an initial premium budget but has no idea if and when additional coverage might be needed to cover future cash flows. Regulations on this point would be helpful.
Even if notice and consent requirements are met, the employer’s death benefits would be taxable under Section 101(j) (other than those going to the insured’s family or trust, or used to buy an insured’s business interest). This applies unless the insured was: a) an employee during the 12 months preceding death or b) at time of policy issue, a director, or among the highest paid 35% of all employees or “highly compensated” as defined by IRC Section 414(q). Section 414(q) includes 5% owners and those earning over $95,000 in the “highly compensated” definition.
Eligibility screening. If the bill passes, case designers will need to use a new, bright-line compensation test to screen and eliminate employees below the $95,000 threshold. This would be interesting for several reasons.
For example, case designers looking to bulletproof nonqualified plans from ERISA have not had a bright-line compensation test to ensure employees are in the “top hat” group. As a result, providing clients with guidance in the ERISA area has been difficult. The Department of Labor has yet to issue regulations defining the “top hat” group phrase.