Federal officials have issued guidance that may be of interest to financial advisors in the executive benefits market.
The Internal Revenue Service has answered a question concerning an employer that has splits its modified endowment contract business in Revenue Ruling 37-38.
The ruling concerns an employer that owns multiple MECs issued by one insurance company, then exchanges some of the MECs for MECs issued by a second insurance company. Someone has asked whether the employer should aggregate all of the MECs together, to comply with Section 72(e)(12) of the Internal Revenue Code, or aggregate each insurer’s MECs separately.
Melissa Luxner, an IRS financial institutions and products specialist, writes in the ruling that the taxpayer does not have to aggregate the MECs from the second company with the MECs from the first company.
The federal government came up with the MEC rules to keep taxpayers from avoiding taxes by pumping what officials believe to be too much cash into life insurance policies. Holders of MECs can pass on death benefits to beneficiaries free of income taxes when they die, but, in many cases, they may have to pay taxes and penalties on any distributions while they are alive.
Under federal law, the taxpayer’s new MECs can be treated separately from the old MECs, because the MECs were issued separately by different companies in different years, Luxner writes.
A copy of the endowment contract revenue ruling is on the Web