Proposed by Senator Jeff Bingaman (D – New Mexico) the COLI provision was passed Wednesday by the Senate Finance Committee along with the rest of theNational Employee Savings and Trust Equity Guarantee Act (NESTEG) (See Finance Committee Gives Grassley Pension Bill the Go-Ahead ), according to an Associated Press report.
>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.
>Currently, companies 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.
>The proposed provision would require businesses to pay tax on COLI payments if the insured person has not been a company employee in the year preceding his death. The restriction would apply prospectively, but taxes would not apply if COLI proceeds:
- go to the worker’s family
- are used to buy back the worker’s ownership in the company
- if the worker, while not an employee, could still be considered a “key” individual to the company.