The Internal Revenue Service has completed regulations that are supposed to keep employers and insurers from playing games with the values of life insurance contracts used in employee compensation arrangements.[@@]
Some aggressive tax planners have been using life insurance policies and annuities with artificially low cash values, or taxable values, to fuel compensation programs.
Some of the products, for example, have cash surrender values that increase dramatically after the products are transferred to employees, IRS officials say. The IRS calls those products “springing cash value” products.
Now, the new final regulations, based on proposed regulations released in February 2004, are supposed to require employers to come up with reasonable estimates of “fair market value” when reporting on 412(i) defined benefit retirement plans and other plans that qualify for special tax breaks.
The IRS will be calculating the “bargain element” in a transaction by subtracting the value of the consideration an employee pays for a life insurance policy or annuity from the fair market value.
From now on, “any such bargain element is treated as a distribution,” Bruce Perlin and Linda Marshall, IRS tax exempt entities specialists, write in the preamble to the final regulations.