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Financial Planning > Tax Planning > Tax Reform

Congress Faces Full Plate Of Financial Issues

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Obscured by the intense debate over the shape of healthcare reform legislation, congressmen returning to work Sept. 8 must also deal promptly with the future of the estate tax; otherwise, without congressional action, the levy falls to zero in January before returning to 2001 levels in 2011.

Besides the estate tax, Congress will be dealing with a whole host of issues under the category of regulatory reform.

In general, industry lobbyists and others believe that any action this fall on insurance issues, other than the estate tax, will be limited to House consideration on a bill-by-bill basis of the components of financial services regulatory reform.

Senate action is expected to take place in one large measure sometime next year.

Financial modernization issues that will be on the congressional agenda include: whether to put insurance products within the scope of a proposed Consumer Financial Protection Agency; the scope of the authority of a proposed systemic regulator; expanding the authority of federal regulators to deal with troubled financial institutions beyond banks to insurers and securities firms; and the role of the federal government going forward in regulating the business of insurance.

Two proposals designed to do this would create an optional federal charter and an Office of National Insurance. Other legislative proposals deal with reforming and modernizing the surplus lines and reinsurance industries. Another bill would re-create the National Association of Registered Agents and Brokers.

Within the same category, Congress is debating how to improve regulation of derivatives in the wake of the problems at American International Group and at banking and securities firms.

Additionally, legislation that would set new limits on executive compensation and deferred compensation plans is also under discussion. The House has already passed legislation dealing with executive comp, although the Senate has not yet acted.

These two issues are of particular concern to life insurers. According to Steve Brostoff, a spokesman for the American Council of Life Insurers, life companies are major end-users of derivatives, “which are very useful instruments in managing risk” of insurance companies.

ACLI would support federal regulation of the derivatives market and marketplace professionals, Brostoff says. And, federal regulators should have the ultimate authority to resolve conflicts between state regulation of the derivatives market and marketplace professionals, he adds.

At the same time, the functional regulator of life insurance companies, whether state-based or federal, should retain jurisdiction over life insurers’ use of derivatives, Brostoff says.

As to the deferred compensation issue, it impacts life insurers and agents as both consumers and marketers of compensation products, industry officials said.

This issue will be taken up two different ways, through financial services regulatory reform, and in dealing with comprehensive tax reform mandated by the expiration next year of the 2001 tax cuts.

Officials of the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors have consistently urged Congress to be mindful that offering deferred comp arrangements to employees of a company is good for employees and the company. “And when these are paid out,” NAIFA officials say, “the government ultimately gets the tax it is due.”

Both AALU and NAIFA are urging Congress to keep the current tax rules in place, officials say.

Officials of AALU and NAIFA believe Congress is most likely this fall to decide to extend 2009 estate tax rates for one year as members continue to seek consensus for comprehensive estate tax reform.

Under current law, the estate tax levy for 2009 is a $3.5 million per-person exemption and a 45% maximum tax rate. The 2011 exemption is set to return to $1 million per person, and a 55% maximum tax rate.

The consensus is that Congress will ultimately decide to retain the 2009 levels as the base for permanent tax reform, indexed for inflation. But the precise language remains to be negotiated.

In fact, the House is considering passing a so-called “one year patch,” when it returns in September, says Sarah Spear, director of policy and public affairs at the AALU.

NAIFA officials agree, saying that “given the overwhelming number of key issues Congress is dealing with, we would not be surprised to see Congress kick the can down the road by simply extending 2009 rules into 2010, and then dealing with the estate tax issue next year, either separately or perhaps as part of an overarching tax reform discussion.”

Among the issues that must be decided is whether to add reunification and portability as part of any permanent estate tax reform.

Industry officials believe regulation of derivatives and the proposed Consumer Financial Protection Agency, both parts of Treasury’s financial regulation reform, are the two most likely issues to see committee action, probably only in the House.

The industry is united in opposing having insurance products regulated by the proposed CFPA.

Specifically, Brostoff says ACLI believes insurance products and practices are already strictly regulated and should not come under CFPA authority.

NAIFA agrees, noting that it “strongly supported” that position in recent testimony before the Financial Services Committee.

NAIFA officials say they are also “working to ensure that new laws and regulations governing broker-dealers and investment advisors within the context of financial services regulatory reform will be practically workable for our members.”

Other issues that will be debated as part of reform include creation of a Treasury agency to provide advice on insurance issues. These issues would include recommending whether an insurer should be subject to federal oversight through a systemic risk regulator; authority to require insurers and state regulators to provide financial and other data to the sub-agency; and authority to negotiate trade pacts with foreign governments.

There are two bills in the House dealing with these issues. One, introduced in April by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the House Financial Services Committee, would create an Office of Insurance Information within the Treasury Department.

Another bill, sent to Congress by Treasury in early July, would create an Office of National Insurance. It would have stronger pre-emptive power and subpoena authority than the Kanjorski bill.

NAIFA also supports passage of legislation re-creating the National Association of Registered Agents and Brokers, and efforts to harmonize the regulations of investment advisors and broker-dealers and to hold them to a fiduciary standard of care, its officials in Washington say.


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