Obama Administration FY 2013 Budget Proposal and Business Tax Reform Framework
As noted in the 2/13/2012 Ad Hoc LRA, the Obama administration released its FY2013 Budget Proposal and the General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals. As many within the insurance industry expected, the latest budget included the same insurance-related proposals as the 2010-2012 fiscal year budgets. One COLI proposal would disallow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20% owner of the business. Currently, policies covering officers, directors, and employees (regardless of ownership stake) are exempted from this interest disallowance rule. Despite these proposals being included in each of the previous Obama Administration budgets, no bill has ever been introduced to implement them.
In a separate Ad Hoc LRA, we noted that the administration released its business tax reform framework. Among other things, the plan would lower the corporate tax rate from 35% to 28% and would attempt to address a number of corporate “loopholes,” including reforms related to the insurance industry and insurance products. The framework included the COLI proposal described above although the framework did not provide much detail regarding the referenced reforms or whether such reforms would be intended on a retrospective or prospective basis. In the current political climate, it’s deemed unlikely that sweeping tax reforms will be acted upon prior to this year’s presidential election.
New York COLI Franchise Tax Bills
As noted in previous LRAs, in January 2011, New York state senator Diaz and Assemblyman Crespo filed NY SB 262A and AB 1111 respectively. These bills seek to impose a 50-percent franchise tax on the gross proceeds of any benefits received from life insurance policies an employer obtains on its employees and/or retirees. As written it would apply to any company that does business in New York, maintains an office in New York, or owns or leases corporate property in New York. The franchise tax would be applicable for taxable years beginning on or after January 1, 2014. Neither bill was successful getting out of committee in 2011, but both bills were recommitted for committee review in January 2012. Diaz and Crespo introduced virtually identical bills (SB 6236 and AB 9439) in the 2009-2010 legislative session and neither made it past committee review.
Proposed Changes to Market Risk Capital Rules
As noted in the 12/7/2011 Ad Hoc LRA, the federal banking agencies issued a notice of proposed rulemaking (NPR) to modify the agencies’ market risk capital rules published in the Federal Register on January 11, 2011. The January 2011 NPR did not include the methodologies adopted by the Basel Committee on Banking Supervision (BCBS) for calculating the standard specific risk capital requirements for debt and securitization positions, because the BCBS methodologies generally rely on credit ratings. The December 2011 NPR further complies with Dodd-Frank Section 939A, which requires all federal agencies to remove references to and requirements of reliance on credit ratings from their regulations and replace them with appropriate alternatives for evaluating creditworthiness.
The comment period ended on February 3, 2012. Since the regulators indicated an intention to apply similar alternatives to the use of credit ratings when implementing changes for the General Risk-Based Capital Rules in the near future, several of the commenters urged the regulators to postpone finalizing any rules until a concurrent proposal is issued for feedback from a broader base of interested financial institutions. Additionally, many comment letters submitted on behalf of financial institutions questioned the suggested treatment of securitization exposures.
Private Action DMF Suits Against Prudential and MetLife
In recent months, state insurance regulatory agencies and state treasurers have been requesting that life insurance companies use the Social Security Administration’s Death Master File (DMF) to determine if an insured has died and their beneficiaries are due benefits or the state should receive the benefits under unclaimed property laws. A number of private action lawsuits have been filed against insurers Prudential and MetLife including claims of fraud and false and misleading statements regarding payment practices.
On February 2, the House Ways and Means subcommittee on social security held a hearing to address the accuracy and identity theft issues of the DMF. Reportedly, approximately 14,000 individuals are incorrectly listed as deceased on the DMF. Despite sentiments expressed over the improper use and abuses of the DMF, many of the hearing participants did not want to see the DMF limited to use by governmental agencies (which is exactly what H.B. 3475 was introduced to do).
Ad Hoc LRA – February 13, 2012
FY2013 Federal Budget Proposal
Today, the Obama Administration released the FY2013 proposed budget and the Treasury Greenbook. As many within the insurance industry expected, the latest budget included the same insurance-related proposals as the 2010-2012 fiscal year budgets. One such proposal is an expansion of the pro-rata interest expense disallowance for corporate-owned life insurance. The COLI proposal would only allow an exception from the pro-rata interest expense disallowance on contracts covering 20-percent owners. Currently, contracts covering the lives of employees, officers, and directors are also exempted. It would apply to contracts issued after December 31, 2012. Another insurance-related budget provision would modify dividends-received deductions (DRD) for life insurance separate accounts. The DRD proposal would repeal the existing regime for prorating a life insurance company’s investment income. According to some reports, the DRD proposal, if enacted, would negatively impact the earnings of large life insurance companies.
Despite these proposals being included in each of the previous Obama Administration budgets, no bill was ever introduced to implement the proposals. In the current political climate, it is unlikely that a bill on these matters would pass even if one were introduced.
The insurance industry, including the Association for Advanced Life Underwriting (AALU) and the American Council of Life Insurers (ACLI), has been active and vocal in opposing both the COLI and DRD proposals. In April 2011, a bipartisan group of 31 representatives of the House Ways and Means Committee wrote to Secretary Timothy Geithner expressing their disappointment that these proposals resurfaced in the FY2012 budget proposal despite a significant majority of the Committee stating serious concerns about the proposals in a 2010 congressional letter. We will continue to track these and other relevant legislative developments.
(References: The proposals are listed on Table S-9 (PDF page 221) in the FY2013 Budget. In the Greenbook, the COLI proposal is discussed on PDF page 116 and the DRD proposal on PDF page 114.)
Ad Hoc LRA – February 24, 2012
President’s Framework for Business Tax Reform
On Wednesday, February 22, the Obama administration released its business tax reform framework. The plan would lower the corporate tax rate from 35% to 28% and would attempt to address a number of corporate “loopholes,” including reforms related to the insurance industry and insurance products. One insurance industry change that was mentioned would disallow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20% owner of the business. Currently, policies covering officers, directors, and employees (regardless of ownership stake) are exempted from this interest disallowance rule.
The framework did not provide much detail regarding the referenced reforms or whether such reforms would be intended on a retrospective or prospective basis. A number of the tax reforms appear to be consistent with earlier budget proposals from this administration. As reported in our 2/13/2012 Ad Hoc LRA Update, the FY2013 Budget Proposal and the General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals identified the same list of insurance industry reforms as each of the previous budget proposals from this administration. In the budget proposals, the COLI reforms are applicable to new contracts issued after a proposed effective date.
In the current political climate, it’s deemed unlikely that sweeping tax reforms will be acted upon prior to this year’s presidential election. We will continue to track this and other relevant legislative developments.