The insurance industry has secured broad business trade group support for its effort to modify or kill provisions in Senate legislation that could devastate deferred compensation plans.

The Association for Advanced Life Underwriting, Falls Church, Va., and the American Council of Life Insurance, Washington, call the provisions “draconian” in a letter sent Tuesday to House leaders and to all members of the Senate.

Earnings on past deferrals would be treated as additional deferrals for purposes of the annual limitation. Because of this, “violations of the new rule could occur merely as the result of the passage of time, and not as a result of any action by the employee or the company,” AALU and ACLI officials write.

The AALU and the ACLI have persuaded groups such as the American Bankers Association, Washington, and the National Association of Manufacturers, Washington, to help them oppose the deferred comp provisions.

But implementation of the provisions would hit life insurers especially hard, because many deferred comp plans use life insurance as a funding vehicle, says Michael Kerley, a senior vice president at the National Association of Insurance and Financial Advisers, Falls Church, Va.

“Other financial vehicles are used, as well, of course, but life insurance is a mainstay,” Kerley says.

Members of the Senate Finance Committee added the deferred comp provisions along with a package of small business tax cuts to an amended version of H.R. 2, the House minimum wage bill.

On Wednesday, Republicans blocked a Senate minimum wage bill that leaves out the tax cuts. Republicans’ defeat of the “clean” minimum wage bill appears to clear the way for passage of a version that includes the tax cuts and the deferred comp provisions, observers say.

The insurance industry may have better luck at stopping the expanded Senate version of the bill in the House, where Democratic House leaders have pushed for passing the clean version.

One deferred comp provision would cap the amount that employees can defer till retirement to an employee’s average taxable compensation during the previous 5 years, or $1 million, whichever was less.

Although the provision seems at first glance to be aimed at the wealthy, the “proposal would impair the ability of hundreds of thousands of mid and upper-level employees to save for retirement through nonqualified deferred compensation,” AALU Chief Executive David Stertzer says.

NAIFA also believes “that this proposal goes far beyond, and reaches much farther down the work chain than the highly paid executives the Senate Finance Committee was apparently targeting,” Kerley says. “This will impact the compensation practices for middle managers of a lot of public as well as private corporations.”

In addition, the deferred comp legislation “actually is retroactive, which is one of the worst possible things you can do in the tax code,” Kerley says.