Industry Dismayed Over Treasurys Final Rule On Split-Dollar
By
Washington
The life insurance industry is expressing dismay over the Treasury Departments decision to promulgate a final rule on split-dollar life insurance arrangements without granting an extension of the current safe harbors.
"Frankly, we are surprised and disappointed at these regulations," says Frank Keating, president of the American Council of Life Insurers, Washington.
He says that under the new rules, employees covered under split-dollar life insurance arrangements will be taxed not only on the value of the current life insurance protection, but also on the policy cash value.
This, Keating says, is contrary to the basic tax rules for life insurance. The regulations also are puzzling, Keating says, because they interfere with the employer-employee relationship.
"Typically, the split-dollar life insurance policy arrangement is the result of a negotiation between the two sides," Keating says. "And Congress has repeatedly promoted the provision of life insurance to employees.
"It doesnt seem very wise to be upsetting appropriate, long-held regulations that many companies and employees rely on," he says.
In addition to promulgating the rule, Treasury rejected a request from the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both of Falls Church, Va., to extend the current safe harbors relating to split-dollar arrangements to Dec. 31, 2004.
Instead, the safe harbors will expire Dec. 31, 2003.
Due to a confluence of events (including the NAIFA annual meeting, a Senate Finance Committee markup of a major tax bill and an approaching hurricane) National Underwriter was unable to connect with representatives of AALU prior to press time.
However, in a formal statement presented to Treasury during consideration of the regulation, AALU and NAIFA questioned Treasurys legal authority to tax the cash value of split-dollar arrangements.
They noted that under Section 72 of the Tax Code, the investment element of cash value life insurance is not taxable until cash is actually accessed. The regulation, they say, is inconsistent with Section 72 and therefore must be viewed as an invalid attempt to tax this value.
"While it should be recognized that the Treasury would be warranted in claiming a degree of meaningful discretion in the promulgation of split-dollar rules, that discretion does not include a direct disregard of statutory mandates, nor does it include efforts to undercut the policy thrust of such mandates," AALU and NAIFA said.
Under the final rules, split-dollar arrangements will be taxed under one of two regimes.
