Senatorial Tempers Flare Over COLI

"We will continue to work with the Finance Committee as we urge the committee to proceed as soon as possible to markup," Plybon says.

In his own opening statement, Bingaman challenged the tax policy underlying COLI. Why, he asked, should a corporation be able to buy an insurance policy on an employee and then, years after the employee leaves, get a tax-free benefit?

This system, Bingaman said, creates a disincentive for employers to create qualified pension plans. Moreover, he challenged the industrys insistence that COLI policies fund employee and retiree benefits.

During the questioning of one witness, Greg Jenner, deputy assistant Treasury Secretary, Bingaman raised the issue of the use of COLI.

Jenner acknowledged that while there is anecdotal evidence COLI is used primarily to fund employee benefits, no one really knows.

Bingaman said that, in fact, benefits from COLI policies can be used for any purpose, and there is no obligation to use it to fund employee benefits. It is a problem, he said, when tax preferential treatment is granted for something that may be used to purchase a corporate jet.

Bingaman added that he is not in any way trying to shut down the legitimate uses of COLI policies that cover key employees. Businesses, he says, have a clear insurable interest in these employees and COLI policies covering key employees are entirely appropriate. However, he said, he does not see how an employer can claim to be "losing a whole lot" when a person who already left employment dies.

But Sen. Kent Conrad, D-N.D., who is offering an alternative to the Bingaman language, said his alternative would address any concerns over the use of COLI.

Under the Conrad alternative, COLI would be limited to salaried employees who earn more than $90,000 per year. In addition, all covered employees would have to consent to the insurance. The COLI policy would have to be used to benefit the covered employees and the amount of life insurance would have to be reasonably related to the corresponding benefit.

Conrad said that maintaining the tax incentives on COLI are necessary to encourage savings.

He challenged Bingamans assertion that the COLI rules serve as a disincentive to employers establishing qualified plans. Employers, Conrad said, avoid qualified plans because of the administrative complexity, not the COLI rules.

But Jenner questioned the provision in the Conrad alternative that limits COLI to employee benefits. Specifically, he noted, under Conrads alternative, COLI policies would be held in an irrevocable trust, subject only to the claims of creditors of the employer in bankruptcy and used solely to fund employee benefits.

This approach, Jenner said, could have unintended consequences. Specifically, he noted, the Employee Retirement Income Security Act has different vesting rules for nonqualified pension arrangements than for qualified plans.

Currently, Jenner said, an employer can change or eliminate benefits under a nonqualified plan at any time. It is unclear, he said, whether the Conrad approach to limit the amount of COLI to the amount of welfare benefits is also intended to change the vesting rules.

Some would argue, Jenner said, that changes in ERISA and other rules would be necessary in order to avoid discrimination in favor of highly compensated employees and to deal with adequate funding.

This, he said, would be problematic at best, citing Section 89 of the Tax Reform Act of 1986 as a precedent.

That section, Jenner noted, was enacted to provide pension-like rules for employee welfare plans. After hundreds of pages of complicated IRS regulations trying to interpret the nondiscrimination rules, businesses convinced Congress to repeal Section 89.

The Conrad proposal on COLI, Jenner said, could force Congress to consider new nondiscrimination rules on the provision of retiree health benefits in order to prevent perceived abuses.

Conrad said it is not his intention to create these difficulties and said he is willing to discuss ways of altering his amendment to assure any unintended consequences do not occur.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 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.