COLI in Congressional Crosshairs

May 3, 2002 (PLANSPONSOR.com) - Sentiment seems to be growing in Washington DC that would bar employers from taking out so-called "dead peasant" life insurance policies on workers.

The most recent to speak out is Senator Jeff Bingaman (D-New Mexico), who intends to introduce legislation that would prevent companies from taking out life insurance on rank-and-file workers simply to glean tax-free income, according to the Wall Street Journal. 

COLI Concerns

Companies have put millions of dollars into the company owned life insurance, or COLI, policies. These policies yield tax-free income as their investment value rises, just like conventional whole life policies and companies can also borrow against the policies to raise cash.  Meanwhile the money placed in the policies grows tax-free – and when workers, and former workers, die, the proceeds paid to the employer are also tax-free.

“I cannot support providing tax benefits to insurance policies taken out on the lives of rank-and-file employees when there is no benefit to them,” Bingaman said, according to the WSJ. “This was not the intent of Congress. Not only is it unfair to the workers, but it is unfair to the majority of businesses [that] refuse to engage in these abusive transactions.”  Bingaman is a member of the Senate Finance Committee and chairman of the Senate Energy Committee.

“Key man” insurance policies have traditionally been used to protect the company from financial loss if a key executive dies, while employers frequently purchase “executive” policies as a benefit for top executives – one that can allow executives to effectively shelter compensation from taxes and ultimately receive it tax-free. COLI practices have come under scrutiny by the Internal Revenue Service (IRS) and Congress in the past.

Bingaman says he will ask the Joint Committee on Taxation to calculate how much the practices are costing US taxpayers, according to the WSJ report.

Green ‘Piece’

Representative Gene Green (D – Texas) introduced legislation, the Life Insurance Employee Notification Act (HR 4551) that would require employers to tell employees and former employees and their families whether it has coverage on their lives, and how much, within 30 days of taking out the policy. For policies purchased between January 1, 1985 and the present, employers would have 90 days to notify employees.

Eventually Green plans craft legislation that would require that the beneficiaries of the policies be the individual employees, along the lines of the “insurability interest” guidelines in place in his home state of Texas. In Texas, only relatives, creditors and those with a reasonable expectation of a financial benefit from the continued life of another can take out policies, according to the Houston Chronicle.  The courts have ruled employers don’t have that financial interest in a low level employee in Texas, but it’s legal for key executives.

Currently only five states have laws that require employee consent: California, Ohio, Illinois, Minnesota and Michigan.

HR 4551 reportedly has more than 30 co-sponsors at present.

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