Increased Potential for Tax Reform
President-elect Trump has identified tax reform as one of his administration’s top priorities. With both chambers of Congress being controlled by Republicans, the party seems eager to usher in significant tax reform. During his campaign, Trump touted a plan that he called Donald J. Trump’s Vision. Trump’s plan is largely in line with the Blueprint (also called “A Better Way”) which was released by the House Republicans in June 2016.
Although there is uncertainty as to what will actually be enacted (if anything), the agreement between the Blueprint and Trump’s Vision indicates that the prospect for significant tax reform is more likely than in prior years. It is unlikely that any of the changes would go into effect prior to the 2018 tax year.
Below we highlight some of the high level changes being proposed.
Potential Tax Changes for Businesses:
- Reduction of corporate tax rates; 20% under the Blueprint, 15% under Trump’s Vision
- Elimination of the AMT
- “Small Business” tax for pass through entities will be capped; 25% under the Blueprint and 15% under Trump’s Vision
- Full and immediate write-off for business investments in tangible and intangible assets
- Deduct interest expense only against any interest income only with excess carried forward against future interest income
- Net operating losses will be allowed to be carried forward indefinitely and will be increased by an interest factor that compensates for inflation and a real return on capital
Expected Tax Changes for Individuals:
- Three tax brackets: 12%, 25%, and 33% under the Blueprint, 10%, 20%, and 25% under Trump’s Vision
Potential Implications for BOLI
We will be monitoring the tax reform efforts closely for direct and indirect implications for BOLI. Direct implications include any provisions that apply to the life insurance policies (e.g., the tax deferred treatment of life insurance, pro-rata interest expense disallowance, DAC rules, etc.). Indirect implications include aspects that impact the relative performance of BOLI as compared to alternatives. Of course, lower tax rates reduce both the tax advantage of BOLI and the tax disincentive to surrender contracts. By extension, virtually all BOLI stable value protection contracts include provisions that are potentially impacted by tax law changes. Some such provisions provide SVP providers a right to terminate the contract; others are embodied in the form of qualifying surrender requirements (e.g., a policyholder representation that no tax law change had occurred).
We have inventoried our clients’ agreements and are prepared to discuss potential implications.
Potential for Dodd-Frank Repeal by Trump Administration
A web page on Trump’s Transition Site declares that “the Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”
It is speculated that the Republican-proposed CHOICE Act provides a general direction of how Trump may intend to replace Dodd-Frank.
The CHOICE Act is over 500 pages and touches many areas of financial laws. The Act would repeal the Volcker Rule, Durbin Amendment, Orderly Liquidation Authority, and DOL fiduciary rule. It would also provide a so called “off ramp” to strongly capitalized banks.
NY DFS Regulation on Non-Guaranteed Elements of Life Insurance Policies
On November 17, the New York State Department of Financial Services proposed a new regulation (Insurance Regulation 210). The regulation is set for final issuance 45 days from its publication in the November 30 State Register.
The new regulation imposes several requirements on providers of life insurance with respect to adjusting non-guaranteed elements in their life insurance policies:
- Changes in non-guaranteed elements must be fair, equitable and justified by the insurers experience
- Changes in non-guaranteed elements may not be driven by a desire for profit
- The regulation prohibits discrimination among policies with similar expectations
- The regulations require transparency in the calculation of non-guaranteed elements
- Insurance companies must disclose changes to both the NY DFS (120 days) and policyholders (60 days) in advance of implementing changes.
This regulation appears to be a direct response to recent increases in the cost of insurance imposed by insurance companies and is being touted as a strong consumer protection.
Death Master File Access Requires Certification of Cybersecurity
On November 28, a regulation promulgated by the National Technical Information Service (“NTIS”) went into effect regulating access to the Limited Access Death Master File (“LADMF”). Significantly, the regulation requires an “Accredited Conformity Assessment Body” to submit an attestation that the person seeking access to the LADMF “… has systems, facilities, and procedures in place to safeguard the accessed information, and experience in maintaining the confidentiality, security, and appropriate use of accessed information.”
An “Accredited Conformity Assessment Body” is defined as “a third party conformity assessment body that is accredited by an accreditation body under nationally or internationally recognized criteria…” The regulation states that ISO/IEC 27006:2011 accreditation is sufficient to qualify as an “Accredited Conformity Assessment Body” but also leaves open the possibility for other similar accreditations.
Also of potential significance, NTIS clarified that the fact someone has died is not considered part of the LADMF, this means that disclosing death of an insured to a beneficiary will not be considered a prohibited re-disclosure of LADMF information. Note that the date of death is considered LADMF information which is subject to the disclosure requirements.
CFPB Incentive Compensation Expectations Guidance
On November 28, the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2016-03. The bulletin issues guidance on what the CFPB expects of supervised entities with respect to their utilization of incentive-based compensation programs; the guidance underscores that the risk of incentive programs is that they cause employees “to pursue overly aggressive marketing, sales, servicing, or collections tactics.”
The guidance states that the CFPB expects supervised entities utilizing incentives to institute effective controls including oversight of both employees and service providers involved in the incentive programs. The CFPB emphasizes that a “compliance management system” (“CMS”) is necessary and that a supervised entity must ensure the CMS is effective. The CFPB gives guidance on what steps a supervised entity might take to ensure CMS effectiveness. The steps are broken into the following categories:
- Board of directors and management oversight
- Ensuring that the incentive programs’ policies and procedures are transparent and allow for adequate safeguards
- Implementing comprehensive training
- Implementing monitoring programs that track key metrics
- Promptly implementing corrective actions
- Collecting and analyzing consumer complaints
- Scheduling independent audits to address incentives
NAIC Life Insurance Policy Locator
On November 22, the NAIC announced a Life Insurance Policy Locator service intended to assist individuals in locating a deceased person’s lost life insurance policies and annuities. This appears to be an updated version of an application announced by the NAIC in August 2016, which we reported in the August LRA update. At this time, it remains unclear whether this application will be of any use to corporate owners of insurance.