Senate Agrees to Recycle 'Janitors Insurance' Provisions

October 3, 2003 ( - The US Senate Finance Committee has agreed to reconsider a measure approved two weeks ago that would tax life insurance proceeds paid to companies that take out policies on low-ranking employees.

>The move comes after the Finance Committee tacked on a requirement for companies to pay taxes on death benefits for corporate-owned life insurance (COLI) policies for employees who have been separated from employment with the company for at least one year. Under these arrangements, companies purchase broad-based COLI arrangements – nicknamed janitors insurance by brokers selling the policies – only to take the policy out on workers with the company as the beneficiary. By borrowing most or all of the cash value within the policies and deducting the interest on the loans, companies could generate cash flow with little capital outlay, according to news sources.

However, employers and industry groups argue that COLIs are a valid way of financing various employee benefits in a time when such costs are rising rapidly.   Firms currently do not pay taxes on proceeds from these policies, even if the proceeds do not go to the worker covered by the policy and even if the worker no longer works for the company. Thus, companies often take advantage of that break, purchasing policies on the lives of many of their workers.

>Hearing these concerns, committee Chairman Charles Grassley (R-Iowa) said the panel had agreed to change the effective date of the provision from September 16, the date of committee action, to the date of enactment. Further, the committee agreed to hold hearings on the issue the week after next and then hold a new markup on that provision.

Not to be affected by any possible changes to the COLI amendments is the rest of the National Employee Savings and Trust Equity Guarantee Act (NESTEG) (See  Finance Committee Gives Grassley Pension Bill the Go-Ahead ).   Senator Jeff Bingaman (D – New Mexico), who proposed the amendment, voiced is disappointment with the recall, saying the amendment is necessary due to the structure of the current tax laws that allows businesses to take out such policies and enjoy substantial tax benefits, even though the affected employees often are unaware of, and do not benefit from, the policies.