A life agent group wants the Internal Revenue Service to address split-dollar life insurance arrangements in Internal Revenue Code Section 409A, a new provision that deals with deferred compensation arrangements.

Simply stating in the preamble to the proposed regulation that the regulation “may apply” to certain types of split-dollar arrangements is not enough, according to Stuart Lewis, a lawyer who testified this week on behalf of the Association for Advanced Life Underwriting, an affiliate of the National Association of Insurance and Financial Advisers, Falls Church, Va., at a hearing held by the IRS and the Treasury Department.

Lewis said he also was speaking on behalf of NAIFA.

“The unique character of life insurance in general and split-dollar life insurance arrangements in particular necessitates specific responses from the IRS and the Treasury Department with respect to the issues raised by Section 409A,” Lewis said, according to a written version of his remarks.

The IRS proposal should be revised to address the “material modification trap” created by conflicts between the proposed rule and final regulations dealing with split-dollar life policies that were issued in September 2003, Lewis said.

“A split-dollar life insurance arrangement that is subject to Section 409A, even if it was grandfathered under the 2003 split-dollar regulations, may need to be modified to bring it into compliance with Section 409A,” Lewis said. “The 409A proposed regulations contain rules permitting those types of modifications to be made before the end of 2006.”

But Lewis noted that there are no comparable provisions in the 2003 rule.

Because of the lack of transitional relief in the 2003 rule, a grandfathered split-dollar arrangement that stays the same may fail Section 409A, and an arrangement that is amended may lose its grandfathered status, Lewis said.

The IRS also should clarify regulation provisions dealing with premium clarification, Section 1035 exchanges, split-dollar safe harbors and new aggregation rules, Lewis said.

In addition, Lewis called for revisions to independent contractor safe harbor language, safe harbor certification rules, and provisions dealing with commission compensation and separation from service.

CLARIFICATION: Due to an editing change, the role of Stuart Lewis was described incompletely in an earlier version of this article. Lewis spoke at the hearing on behalf of the Association for Advanced Life Underwriting, an affiliate of the National Association of Insurance and Financial Advisers, Falls Church, Va., as well as on behalf of NAIFA.