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Tax Issues Will Top The Bill On The Hill Next Year

by Arthur D. Postal

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Tax issues–especially protecting current policy on the inside buildup in life insurance–and enactment of legislation creating an optional federal charter, dominate the legislative priorities of the life insurance industry for 2008.

However, given that, “all legislation that is debated in 2008 will be viewed through the prism of how it will affect both parties’ chances to win the White House in November,” says David Stertzer, CEO of the Association for Advanced Life Underwriting. Substantive action on tax legislation or anything else is unlikely to occur, officials of various trade groups agree.

“While we have seen tax bills completed in an election year over my last 20 plus years of working in Washington,” Stertzer says, “the stakes surrounding this presidential election and the partisan fervor we have already seen make me believe it will be extremely difficult for a major tax bill to be enacted next year.”

But he says that deferred comp and estate taxes will be discussed at length in 2008.

In fact, says Kim Dorgan, executive vice president, federal relations, for the American Council of Life Insurers, because of the 2008 presidential elections, “we expect most congressional activity to take place between January and July.”

She says Congress will likely adjourn for August and then return for a month before adjourning again in October ahead of the elections.

In general, Dorgan says, “The pay-as-you-go environment in Congress will continue in 2008.” That means “that Congress may look for sources of revenue to pay for certain programs,” meaning, as Dorgan explains, that ACLI–and probably all other insurance industry trade groups–”will keep a close eye on any [tax] legislation that could affect the industry.”

National Association of Insurance and Financial Advisers officials say that a key problem for 2008 and beyond is working with a successor to Rep. Jim McCrery, R-La., ranking minority member of the House Ways and Means Committee.

McCrery said in early December that he did not plan to run for reelection and is likely to give up his role as chief spokesman for Republicans on taxes in the House, according to Michael Kerley, senior vice president of federal government relations for NAIFA. It is unclear who will succeed McCrery as ranking member, and when the transition will occur.

“McCrery’s decision to retire is a new factor that must be added to the mix,” Kerley says. “When there are new players, there is a new game.”

Kerley calls it a “major loss,” because McCrery “has a lot of expertise on insurance tax issues.

“NAIFA has spent a lot of time with McCrery and his staff educating them on inside buildup and on proposed taxes that will have either a direct or indirect affect on inside buildup,” Kerley says.

He notes that the 1990 Treasury initiative of “getting at” inside buildup in life insurance and annuities through taxes on “deferred acquisition costs” is one taxing tool about which NAIFA remains ever-vigilant.

Inside buildup must be protected, Kerley says, noting that annuities provide the only guaranteed-income-for-life product for retirees, a key industry selling point.

And, he says, “non-qualified deferred compensation packages are always at risk.”

Alex DelPizzo, vice president and outside counsel of the National Association of Independent Life Brokerage Agencies at lobbying group Winning Strategies, says, “The industry is going to see Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, pursue his ‘mother of all tax reform proposals” in 2008.

“Anything you see will be pre-positioning for the next president,” DelPizzo says. “The next president will set the new tax agenda, with the Bush tax cuts expiring.”

Besides taxes, an allied issue, retirement security legislation, will also be on the minds of trade groups, affecting such products as long-term care, annuities and 401(k)s.

Federal regulators also have several issues of great importance to the industry that remain to be dealt with, two of which concern the Pension Protection Act of 2006.

For example, the Department of Labor still must issue final regulations dealing with the selection of an annuity provider by an employer, according to ACLI officials.

One key issue is removing barriers that bar employers from making a lifetime annuity a distribution option at retirement. “That was included in the bill, but no final rule has been issued to ease the rules from turning the funds in a 401(k) into an annuity,” says Jack Dolan, an ACLI spokesman. “The ACLI continues to work with the DOL so that the rules are conducive to use of annuities in 401(k) and other annuity plans,” he says.

Another issue outstanding is rules relating to corporate-owned life insurance that must be issued by the Treasury Department. The issue was dealt with in the Pension Protection Act, but “we are still working with Treasury officials on guidance and clarification as to what employers must do to comply with the notice and consent provisions on sale of COLI,” Dolan says.

Regarding the optional federal charter, the ACLI and NAILBA are both members of the OFC Coalition, a group of financial services trade groups and companies who are strong supporters of an OFC.

Dorgan says the ACLI will continue to pursue legislation that would enact an optional federal charter for insurance regulation. She notes that the House held two hearings on insurance regulation in 2007, and “we anticipate that the Senate will hold hearings in 2008.”

DelPizzo says that besides Senate hearings, the White House and Treasury are working on a report on how the international competitiveness of U.S. financial institutions can be improved through different regulatory mechanisms. The Treasury request for comment on insurance issues, which closed in November, yielded 350 letters.

Depizzo says NAILBA is “clearly for reform.” The life insurance industry “needs a better system than we have now.

“We don’t see a way that the states or the National Association of Insurance Commissioner have a mechanism to enforce change across state lines,” he says.

“Absent that, we don’t see any other reform mechanism that doesn’t involve federal regulation,” he says. “If there was a way that could conceivably enforce some sort of change, we would certainly look at that.”

But NAIFA remains on the fence. William Anderson, senior vice president, law and government relations at NAIFA, says the trade group “is committed to working with state and federal regulators to ease the unnecessary regulatory burdens that currently exist for our members.”

He says NAIFA members want one standard for licensing and education and they want to offer competitive products to their clients. “Therefore, NAIFA will continue to consider any and all regulatory options to that end–including the optional federal charter.”

AALU officials note that earlier this month, the Senate Finance Committee announced that it would delay working on the 2008 Education Bill until next year.

“The Education Bill is believed to be a likely vehicle for pushing a revised nonqualified deferred compensation package as a revenue raiser, though the focus has been shifting to the perceived deferred compensation abuses of offshore corporations,” says Stertzer.

“A proposal to tax such arrangements that was included in Chairman Rangel’s massive tax reform bill has garnered significant attention as a possible alternative minimum tax pay-for,” he says.

The proposal on domestic deferred compensation arrangements, if introduced, is expected to contain substantial revisions to the current program, Stertzer says.

He says AALU believes that the “lesser of” language will be dropped in favor of a true $1 million cap and earnings will not be counted against the cap. AALU expects that the revised proposal may exempt non-elective arrangements that “mirror” qualified pension plans maintained by the employer, he adds.

Mirror plans essentially are those that provide the same contribution percentages as under the employer’s qualified retirement plan, but for compensation over the amount eligible under the qualified plan, Stertzer says.

“AALU believes that exempting only ‘mirror’ non-elective deferred compensation plans would not fully address our concerns, and we continue to work with the Senate Finance Committee and urge a full exemption for true non-elective arrangements,” AALU President Larry Raymond says.

Given that Republicans may anticipate losing seats in both Houses in 2008, the AALU believes they will make a strong effort to see their estate tax priorities dealt with in 2008. Stertzer and Raymond say Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, “set the stage for that” by agreeing in October to hold another hearing and a mark up on this issue in the Finance Committee in the spring of 2008.

“We will have votes on the estate tax next year,” warns Stertzer. “There is an estate tax amendment filed as part of the farm bill that will be voted on and we will see action on this issue–both in Committee and on the floor of the Senate–on multiple occasions.”

Stertzer says there “will be pressure to get something done. As I have met with members of Congress, particularly in the Senate, I have noticed more and more that a significant amount of issue fatigue has set in; they want to permanently resolve this issue.

“Whether they can make the numbers work in an election year, however, is very difficult to see happening,” he cautions.

Noting that the insurance industry has had to deal with the issue since the Bush tax cuts of 2001, “our members’ clients need long-term certainty on the issue.

“We need the right compromise enacted before we reach 2010–and that compromise absolutely needs to include the reunification of the lifetime gift and estate tax credits,” says AALU’s Raymond.

“AALU will continue to engage with lawmakers, stressing that reunification is an integral part of any sustainable, permanent estate tax because it enables clients to do more planning during their lifetime,” Raymond says.