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Financial Planning > Tax Planning > Tax Reform

Industry Issues Piled High On Congress's Plate

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Besides the tax reconciliation bill that has stymied it since last winter, Congress will be dealing with a number of other issues, including pocketbook ones, critical to the life insurance industry when it resumes work this week.

For example, the issue of reforming the defined benefit pension system is still on the table. Insurers provide products that fund defined benefit programs and also administer them, but the legislation Congress is wrestling with contains a number of other provisions important to insurers, including several that will add to their product offerings and facilitate greater marketing of their products to owners of 401(k) plans.

Additionally, the Senate is again scheduled to take up legislation next month that would phase out the estate tax. For its part, the insurance industry supports reform rather than repeal of the estate tax.

Among sensitive issues in the pension reform legislation the industry is supporting is a provision in the House version of the bill that would allow agents and brokers to provide owners of 401(k)s with investment advice. There is strong concern about this provision among senators who are members of the committee seeking to reconcile the differing House/Senate versions of the bill.

The industry also is voicing strong support for provisions allowing a long term care rider to annuities and allowing workers to roll over up to $500 in their flexible spending accounts.

As conferees left for recess, the hospital industry launched a campaign to add a provision allowing employers to offer LTC insurance through cafeteria plans and FSAs.

As a staff official for America’s Health Insurance Plans pointed out, this provision is not in the bill, but it should be. “It doesn’t have a high price tag but would benefit millions of people who ultimately would need long term care,” an AHIP official said. A letter signed by Sen. Olympia Snowe, R-Maine, is being circulated for signatures by other members of the conference committee, the AHIP official said, which would allow employers to offer LTC insurance as a non-taxable benefit as part of a cafeteria plan or FSA.

Another provision of the legislation on the industry’s priority list is inclusion of language codifying the tax treatment as well as best sales practices for corporate-owned life insurance. That provision, regarded as less controversial, is contained in the Senate version of the bill, while similar legislation in the House has broad and bipartisan support.

A provision that would make permanent increases in IRA and 401(k) contribution limits and catch-up provisions for those over 50 contained in a 2001 tax bill are also of great interest to the insurance industry.

The bill also has provisions sought by the industry that provide an opt-out, rather than an opt-in for 401(k) plans, automated default investments and automatic contribution increases.

Regarding the estate tax phase-out, Republicans, led by Senate Majority Leader William Frist, R-Tenn., plan to bring up for a vote in early May legislation that would phase out the tax.

The insurance industry wants the threshold raised from the current $1 million but not phased out entirely. Under current law, the threshold is gradually being raised until it is phased out in 2010, but it returns to the level it was in 2001 of about $600,000 the next year.

The 60 votes necessary to end the tax are not there, and many Democrats and moderate Republicans want to postpone as long as possible a decision as to what to do.

But a recent national poll appears to buttress the insurance industry’s position on the issue. The poll, released April 6, shows that 57% of voters prefer retaining the tax as is or reforming it. Only 23% favor repeal.

The number favoring preservation or reform rises to 68% when respondents learnmore information about the estate tax, with 23% again favoring repeal. “For several years now, I have publicly stated my conviction that we must preserve the estate tax,” said Agnes Gund, former president of New York’s Museum of Modern Art and a leading philanthropist. “It’s a fair tax onthose who can best afford it, it contributes greatly to our nation’s treasury, and it encourages Americans to give to charitable institutions. I am glad to see more people now agree the tax should be kept.”

“The estate tax has been with us for 90 years, brings in fairly large amounts of revenue at fairly low cost, and affects less than one-third of one percent of the population,” said Sheldon Cohen, tax attorney and former commissioner of the Internal Revenue Service. “Why would we change this?”



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