Representatives of life insurance agent groups are telling the Internal Revenue Service that it must further revise Section 409A, which deals with deferred compensation rules, to address split-dollar life insurance arrangements specifically.

In comments at an IRS and Treasury Department hearing recently, a lawyer representing the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors said it isn’t enough to state in the preamble of the proposed regulation that the rule “may apply” to certain types of split-dollar arrangements.

“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 Sec. 409A,” said Stuart M. Lewis at the hearing. Lewis is a lawyer with Buchanan Ingersoll in Washington.

Regarding non-split-dollar issues in the proposed rule that concern life insurance agents, Lewis also called for revisions dealing with independent contractor safe harbor language, safe harbor certification rules, as well as commission compensation and separation from service provisions.

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

“A split-dollar life insurance arrangement that is subject to Sec. 409A, even if it was grandfathered under the 2003 split-dollar regulations, may need to be modified to bring it into compliance with Sec. 409A,” he said.

“The 409A proposed regulations contain rules permitting those types of modifications to be made before the end of 2006,” Lewis explained.

However, there are no comparable provisions in the 2003 split rule, he added.

As a result, he said, a split-dollar arrangement that is grandfathered under the 2003 regulations is, at the present time, forced to risk loss of grandfather status under those regulations if it is modified to bring it into compliance with Sec. 409A.

“In short, a material modification trap has been created for split-dollar arrangements under which, if they are not amended, they may fail 409A and if they are amended, they may lose their existing grandfather treatment under the split-dollar regulations,” Lewis explained.

In his testimony dealing with problems created by the proposal, Lewis also said that provisions dealing with premium clarification, Sec. 1035 exchanges, split-dollar safe harbors and new aggregation rules must be clarified in the new rule.