Congressional action that might seriously undermine the tax benefits associated with life insurance consumed much of the debate among a panel of 4 experts during the 50th annual meeting of the Association of Advanced Life Underwriting, Falls Church, Va., held here last week.
Titled “The 110th Congress: The Good, The Bad, the Ugly Part 2,” the panel focused particular attention on legislative assaults against life insurance-funded nonqualified deferred compensation plans.
“We need to get our membership energized on this issue,” said Marc Cadin, AALU vice president of legislative affairs. “Otherwise, in the next several years, we may not have a tax-preferred product. It’s really that serious.”
Panelists voiced concern about proposed deferred compensation provisions that might be attached to a future bill needed to satisfy Congress’ pay-as-you-go (PAYGO) rules. Among them: a proposed rule cleared by the Senate Finance Committee that would cap nonqualified deferred compensation not subject to income tax to the lesser of $1 million or the average of the past 5 years of taxable compensation. The provision would also count earnings on nonqualified deferred compensation against the cap for any deferrals after Jan. 1, 2007. And the rule would apply to non-elective deferrals.
“If you violate the cap in any year [under this provision] it’s a nuclear event because all prior deferrals are immediately includable in income and there is a 20% penalty tax,” said Kenneth Kies, a managing director at the Federal Policy Group, Washington, D.C. “It’s pretty much a meltdown if you violate the rule.”
Bill Archer, a former chairman of the House Ways and Means Committee and a senior policy advisor to PricewaterhouseCoopers, New York, added that there is a “very great danger” the proposed law might be extended to cover executive compensation generally.
Panelists expressed satisfaction with the final regulations of Internal Revenue Code Section 409A, an outgrowth the 2004 American Jobs Creation Act that sets guidelines for deferred compensation plans. But they cautioned the regulations may come under renewed scrutiny as Congress seeks ways to fulfill PAYGO rules.
Kies observed the Democratic-controlled House might want to clamp down on deferred comp plans to help fund education, energy and health care initiatives that could cost between $70 billion and $80 billion, though he indicated that legislation reaching the president’s desk is unlikely to require more than $20 billion to $30 billion in funding. He speculated, too, that Congress will likely have to waive the PAYGO rules to reform the alternative minimum tax, or AMT, which he estimated would impose $50 billion in income tax liabilities on some 29 million taxpayers in 2008.
To guard against revenue-enhancing legislation that might adversely impact the tax-favored treatment of life insurance, Cadin said AALU has enlisted the support of its Issues Alliance Partners to participate in a coordinated lobbying campaign.
He added that AALU is also depending on its members–attendees to this year’s conference, as in prior years, took a bus trip to meet with Congressional members on Capitol Hill–to convey the message that that adverse legislation would, among other consequences, negatively affect savings rates, particularly those of middle income employees who depend on deferred comp plans to fund their retirement plans.