Reps Introduce Bill to Eliminate COLI Policies as Tax Shelter

May 19, 2003 ( - US Representative Gene Green (D-Texas) and 14 co-sponsors have introduced a bill in the US House of Representatives aimed at reducing the use of corporate-owned life insurance policies (COLI) on rank-and-file employees.

The bipartisan Taxpayer Savings and Employee Notification Act of 2003 would amend Internal Revenue Code Section 72 to include the income generated by a COLI contract as gross income for any taxable year in which it generates income.   This income would then be directed to the Treasury for use in deficit reduction, according to Washington-based legal publisher BNA.

“If companies want to purchase these policies, they are free to do so,” US Representative Rahm Emanuel (D-Illinois) one of the co-sponsors said. according to the BNA “However, there is no reason for this practice to be subsidized by American taxpayers, especially in these difficult economic times.”

However, a grandfather clause is provided in the bill so that nonleveraged COLI policies purchased before a certain date would not be affected, provided that certain employee retirement benefits are maintained. Further, it would provide a savings clause so that nothing would be interpreted to affect any pending investigations by the US Treasury Department against any employer regarding the purchase of COLI.

Not left out of the bill is a notice and opt-out provision requiring written notice to employees before policies are purchased on their lives. Employees may then choose to opt out and prevent the company from purchasing the policy.   Exempted from this provision are “key man” policies.

This provision is very similar to previous legislation introduced by Green.   Earlier this year Green introduced HR 414 that would deem the nondisclosure of COLI to employees an unfair trade practice under the Federal Trade Commission Act.  The bill would require employers who purchase COLI on an employee to notify the employee of the name of the insurance carrier and benefit amount within 30 days after the purchase (See  Green Springs Back into COLI Fray ).