Report Says 1986 Grandfather Rule For COLI Should Be Terminated

Where there are abuses, there are ways of dealing with them, he adds, but retroactively changing the rules will tend to undercut the publics faith that the tax rules in effect when long-term life insurance arrangements are entered will continue for the life of those arrangements.

As for split-dollar, Schiff notes the recommendation that the issue be left to Treasury. And while he is not thrilled with what might come out of Treasury, he says he prefers that to also having something going on in Congress.

Turning to the moratorium on nonqualified deferred compensation guidance, Schiff notes the concern in 1978 was that Treasury would issue such stiff rules that it might have eliminated such arrangements.

The great majority of nonqualified deferred compensation plans are not abusive, he says.

Schiff says he is always nervous about recommendations to eliminate the moratorium, and possibly throwing out the baby with the bathwater.

The report says Enrons nonqualified deferred compensation programs allowed executives to defer more than $150 million in compensation from 1998 through 2001.

"Enrons deferred compensation plans allowed executives to receive benefits similar to those of qualified plans," the report says.

"To the extent that it is possible for executives to defer taxes and have security and flexibility through nonqualified arrangements, this undermines the qualified retirement plan system," the report adds.

The moratorium on Treasury guidance contributes to the problem, the report says. "The lack of guidance over the last 25 years has given taxpayers latitude to use creative nonqualified deferred compensation arrangements that push the limit of what is allowed under the law," the report says.

It notes that when Enrons stock plummeted, some executives lost millions of dollars in retirement benefits under the companys qualified plans and nonqualified deferred comp arrangements.

However, the report adds, while these losses may appear stunning, many executives also reaped substantial gains from the compensation arrangements.

"Enrons rank and file employees in many cases lost virtually all of their retirement savings because they believed statements made by Enrons top executives up to the very end that Enron was viable and that Enrons stock price would turn around," the report says.

As for COLI, the report says Enrons policies were leveraged, showing about $432 million of debt on $512 million of coverage by November 2001. Many of these contracts were protected by the grandfather rule, the report says.

(Under current law, the deductibility of interest on debt under a life insurance contract is severely limited. This limitation does not apply to policies purchased before June 20, 1986.)

"As years pass from the 1986 date, the value of this tax treatment increases with the growth of the cash surrender value of the grandfathered contracts," the report says.

"This result could be viewed as inconsistent with Congress repeated legislation limiting interest deductions with respect to life insurance contracts," the report adds.

Reproduced from National Underwriter Edition, February 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.