Much of the discussion involved a proposal from Senator Kent Conrad, (D-North Dakota), backed by the industry, which would require companies to meet certain requirements to get associated COLI tax benefits, according to a CCH report.
The Conrad bill requires a company that purchases COLI in the name of an employee to notify the person and obtain written consent to purchase a policy. Companies would not be obliged to follow the notice and consent requirements for certain key employees. Conrad’s proposal would require COLI proceeds to be proportional to the current and projected future costs of the employer’s established benefits and would require companies to use COLI proceeds for retiree and employee benefits and not for general business purposes. The arrangement would apply to non-hourly employees.
Conrad said that COLI is an appropriate – but inefficient – way for companies to fund retiree and employee benefits. However, some committee members, noting a lack of information from companies and the insurance industry, questioned whether the firms are, in fact, using the proceeds from COLI to fund their benefits programs.
The other measure discussed was a COLI amendment to a pensions bill, the National Employee Savings and Trust Equity Guarantee (NESTEG) Bill ( SB 1971), approved by the Finance Committee on September 17. The insurance industry is fighting the bill, which is sponsored by Senator Jeff Bingaman, (D-New Mexico).
Bingaman’s amendment would tax COLI proceeds in excess of premiums paid on life insurance policies of employees who are no longer with the company. Bingaman’s amendment, like Conrad’s, includes a key-man exception (See Senate Committee Proposal Taxes Certain COLI Policies ). Bingaman said at the hearing that he was pushing his amendment because of concerns that a company currently can collect COLI proceeds well after an employee has left the company. Additionally, companies can use those proceeds for any purpose, he said.
Meanwhile, Treasury Department Deputy Assistant Secretary Greg Jenner testified that the COLI issues that the committee was considering are not tax policy questions and would be better left to state insurance regulators. He urged the committee to carefully craft any key-man exception. As to Conrad’s proposal, which would require COLI proceeds to be used to fund benefits only, Jenner warned that it could lead to unforeseen administrative burdens and ERISA-like regulations.
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.