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Life Health > Life Insurance

Senate Keeps COLI Provisions

By Arthur D. Postal

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What will happen in the House, the industry wonders

Washington

Pension legislation passed by the Senate Nov. 16 contains a provision codifying into federal law certain “best practices” regarding the sale of corporate-owned life insurance, which is likely to dissipate the cloud hanging over the sale of this product for several years.

The pension bill was among a flurry of legislation the House and Senate dealt with late last week containing provisions sought by the insurance industry as Congress prepared to take a two-week break before returning to finish up for the year the week of Dec. 5.

But, like so much else Congress has done this year, there was a huge catch.

The pension bill, S. 1783, immediately won a veto threat from the Bush administration because it gives the airline industry 20 years to end the shortfalls in pension plans. And, the House still has not acted on the plan, and it is unclear when it will do so. The House version of the bill, passed by the Ways and Means Committee Nov. 9, does not contain the COLI provisions. Action on that bill is not expected until after the recess, if the House acts at all this year.

Besides the COLI provision, the Senate pension bill allows employers to provide “the safest available annuity” to employees in retirement plans, as well as automatic enrollment in 401(k)s.

The Senate bill also provides for the creation of a “DB(k),” which would be a new pension arrangement combining features of both traditional defined benefit plans and 401(k) defined contribution plans.

The COLI provision is strongly supported by the American Council of Life Insurers, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors.

It would effectively limit COLI to coverage of highly compensated employees and require the consent of insured individuals.

COLI is used by employers both to protect against the financial cost of losing a “key” employee as well as providing coverage on a wider range of employees to help provide funds for the payment of employee and retiree benefits.

Frank Keating, ACLI president and CEO, said that if the House bill is passed this year, a conference is likely to accept the COLI provision, which the industry first won support for in the Senate Finance Committee in 2003. “COLI ‘best practices’ legislation enjoys strong support not only in the Senate but the critical House Ways and Means Committee, as well,” Keating said. “Thirty-one members of the panel support the measure–a strong majority of the panel.”

David Stertzer, AALU CEO, said, “We appreciate the actions of the U.S. Senate and the efforts of House supporters to try to ensure that this provision is enacted.”

He added that, “Codifying best practices will bring certainty that employers, employees and their families can continue to benefit from the business and job protection, and the retirement savings and employee benefits made possible by the responsible use of corporate-owned life insurance.”

David F. Woods, CEO of NAIFA, said, “An employer that can rely on a steady stream of future income, which COLI provides, can plan for the future. It enables the employer to recruit and retain a highly qualified work force and meet tomorrow’s benefit costs. The legislation provides the confidence businesses need today to offer benefits for tomorrow. We’re looking forward to its enactment.”

Regarding the language in the pension reform bill, the American Benefits Council, which lobbies for employers, voiced concern with several provisions.

However, unlike the White House, the ABC said the bill is too tough on employers.

The ABC cited provisions with which it has problems. These include the interest rates used for calculating pension obligations and valuing assets, which ABC officials said “introduce too much unpredictability and cost volatility into pension funding.”

The one-year period over which both assets and liabilities would be averaged “is completely inappropriate for a long-term obligation such as a pension plan,” ABC said. “It will make it extremely difficult for companies to make business plans and force them to hold in reserve excess assets that may be needed to fund the plan.”

As an alternative, the ABC urged three-year averaging, which is a substantially shorter period than current law and which is contained in the House version of the bill.

The Senate bill also imposes additional liabilities on companies with less than investment grade credit ratings–even if their pension plans are well-funded and pose little if any risk to the Pension Benefit Guaranty Corporation, the ABC officials said.

“Third, whatever rules Congress adopts, companies must have sufficient time to adjust to the new standards,” ABC argued.

The COLI Details

==Limits coverage to directors and “highly compensated employees,” who are defined as individuals earning at least $90,000 annually or in the top 35% by compensation.

==Requires employers to obtain the informed consent of any employee before enrolling him or her in a COLI plan.

==Requires employers to report information about their COLI plans to the Internal Revenue Service.

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