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Obama Tax Plan Draws Bead on Insurers

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President Obama’s framework for business tax reform casts an evil eye at corporate-owned life insurance, one of the industry’s most profitable products.

Besides taking particular aim at COLI, the framework, unveiled today, also appears to mirror the sweeping tax hikes on the insurance industry proposed last week in the president’s budget for 2013.

[See also: Obama Calls for Tax Hikes on Life Insurers]

While all the proposals regarding insurance were not fully disclosed, changing the tax treatment for certain policies would be one element of a broader tax hike package involving a number of industries.

The administration’s goal is to reduce the corporate tax rate from 35 percent to 28 percent.

Industry officials speculate that this includes reducing the separate account dividend received deduction and requiring expanded information reporting on life settlements.

At the same time, it would reform and expand the health insurance tax credit for small businesses.

This credit, created in the Affordable Care Act, helps small businesses afford the cost of health insurance, according to analysts at Washington Analysis.

Analyst Ryan Schoen said that “this reform would allow small businesses with up to 50 workers to qualify for the credit (up from 25), provide a more generous phase-out schedule, and substantially simplify and streamline the tax credit’s rules.”

Schoen said that the odds for legislative action on these items in the “near-term are negligible.”

Nonetheless, he said, “they represent a starting point for the debate, which will unfold in earnest in 2013.”

As for COLI, it would end the ability of top officials and directors of business from benefitting from inside buildup that is tax-deferred or never taxed, and financed through debt that allows the corporation to take interest deductions earlier than any gain realized on the life insurance.

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The proposal would also not allow interest deductions allocable to COI policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business.

Industry officials said they were analyzing the proposal and would comment as soon as possible. But one industry official said the industry is getting tired of having COLI and other products repeatedly targeted for revision by various administrations. 

The insurance proposals are part of a five-pronged program that the president said are designed to “eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth.”

He said the closing of the loopholes would be used to lower the corporate tax rate to 28 percent, “putting the United States in line with major competitor countries and encouraging greater investment in America.”

Robert Miller, president of the National Association of Insurance and Financial Advisors, added that, “Corporate owned life insurance provides an important safety net for businesses that employ millions of Americans.”

Miller said that businesses use life insurance to protect against the financial uncertainty associated with the death of an owner or key employee and to fund important employee and retiree benefits. “We believe it would be shortsighted to reduce the effectiveness of these important policies,” he said.

Unfortunately, Miller said, this proposal is nothing new. “We’ve seen efforts to change the rules on business owners and tap COLI policies in the name of tax reform before.”

He said that, “We’re hopeful that with input from the experts at the new Federal Insurance Office (FIO), policymakers will soon come to realize the importance these and other insurance products have in providing security and fueling the U.S. economy.” 

Moreover, he said, the “framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”

Jack Dolan, a spokesman for the American Council of Life Insurance, said that the framework appears to recycle proposals made in the budget including one on COLI.

“We regret that the administration mischaracterizes COLI in its proposed framework,” Dolan said. “COLI is an important financial product that businesses use to protect employee benefit programs.”