AALU Hears Warnings Of Federal Action Against Insurance Tax Benefits

"There is an appetite among congressional members to do something about executive compensation," said Cadin. "But there is a real dearth of understanding as to how these plans work and how they benefit both employers and employees. We've got a lot of educating to do."

Archer agreed, adding: "Deferred compensation is important not just to the policy owner, but also to the aggregate savings of the country that is represented by permanent life insurance. You combine that with security and you have a heck of a message to sell, particularly at a time when the U.S. has a negative savings rate for the first time since the 1930s."

On the question of the estate tax, Jeff Ricchetti, an attorney and principal at Ricchetti Inc., Washington, D.C., observed that repeal or legislation that is "tantamount to repeal" of the estate tax might still be in the offing for the remainder of the current congressional term. He said that pressure is growing on legislators to act in advance of 2010, when the estate tax sunsets for one year before reverting in 2011 to the tax structure that existed prior to the Economic Growth Tax Relief and Reconciliation Act of 2001. (EGTRAA changed the pre-2001 $1 million estate tax exemption and 55% top tax rate with progressively higher exemption levels and a lowering of top tax rates.)

Ricchetti estimated the chance of Congress tacking an estate tax reform measure onto a 2007 budgetary agreement under the current PAYGO rules at "less than 50%. But he speculated that reform backers might attempt to cut a deal with the current administration in 2008 on the assumption that a new Democratic president would be less disposed than a Republican one to okay a generous reform package. Kies observed that reform proponents would likely act in 2009 because a complete phase-out of the tax in 2010 and reversion to the pre-2001 framework in 2011 "can't be allowed to happen."

Invoking a football play analogy, Archer predicted that Congress would defer a final resolution of the issue by locking in, if only temporarily, the 2009 tax structure.

"I've noticed over many years that whenever Congress faces a difficult situation, they'll punt–and there is a way to punt on this issue," he said. "One thing they can do is extend from 2009 into 2010 and 2011 the $3.5 million exemption and 45% tax rate, buying Congress extra time in a way that's revenue-neutral. I wouldn't rule this out."

When the session moderator, AALU CEO David Stertzer, questioned panelists about what Congress might agree to for a long-term solution, the speakers predicted exemption levels ranging between $2.5 million and $3.5 million and a top tax rate at about 40%. Two on the panel, Cadin and Archer, also anticipated a reunified gift and estate tax exemption.

Panelists were less optimistic about prospects for broad tax changes generally, in part because no one in the administration or in Congress is championing overall reform. Near-term, Ricchetti said, what energy exists for reform will be consumed by other issues, including education, energy and national security.

He ventured, however, that several developments–including EGTRRA tax provisions that are due to expire in 2010; a ballooning of entitlement expenses as boomers phase into retirement; and a large economic shock, such as a sharp rise in interest rates–could act as catalysts for reform.

Yet, what form the legislation might take remains a question mark. Kies said it is unlikely Congress would favor a flat tax, value-added tax or other national sales tax because such levies are not as progressive as the current income tax. Ricchetti agreed, noting also that the Democrats are interested in promoting tax-simplification, but not if the trade-off is a less progressive tax code.