WASHINGTON BUREAU -- The Obama administration is calling in its 2012 budget for a new tax on corporate-owned-life insurance (COLI), a cut in the dividends-received deduction for variable life and variable annuity products, and many other provisions of interest to life and health insurers.
If implemented as written, some of the other budget sections would:
- Kick off two years of studies and comments that could lead to an increase in Pension Benefit Guaranty Corp. pension insurance premiums.
- Propose a "Troubled Asset Relief Program (TARP) tax," or financial crisis responsibility fee, that would raise $30 billion over 10 years. For 2011, Obama tried and failed to win approval for a TARP tax that would have raised $48 billion over 10 years.
- Expand the "pro-rata interest expense disallowance" for COLI. This proposal, which has surfaced at least twice before, would keep a company from taking an interest deduction up to the amount of the unborrowed cash value of the COLI policy except in cases in which the insured were a 20% owner of the business. The provision would cancel out the inside buildup for COLI insureds who were officers, directors or employees, according to an analysis prepared by tax policy specialists at the American Council of Life Insurers (ACLI), Washington, and distributed in May 2010 by the Society of Actuaries, Schaumburg, Ill. The Obama administration is hoping this change would raise $7.7 billion between now and 2021.
- Impose a new life settlement reporting requirement that is supposed to raise about $1.2 billion over 10 years, and modify the "transfer-for-value" life insurance death benefit taxation exception, to keep purchasers of policies from avoiding tax on death benefits that are received. The proposal would apply to sales or assignment of interests in life insurance policies and payments of death benefits for taxable years beginning after Dec. 31, 2011.
- Require separate reporting for each life or annuity contract whose investment in a separate account represents at least 10% of the value of the account.
- Fund implementation of the Affordable Care Act.
- Increase the Social Security Administration budget 9%, to $12.5 billion, to help ease the notorious Social Security Disability Insurance claim backlog.
- Create an "automatic workplace pension" program, by requiring employers that have more than 10 employees and have been in business more than two years that have no retirement plans to enroll employees in direct-deposit Roth individual retirement accounts (IRAs) that are compatible with their direct-deposit payroll systems. Unless employees opted out or changed the contribution rate, 3% of their income would go into the Roth IRA. In the past, administrations have combined the automatic IRA proposal with an expansion of the saver's credit, but a saver's credit expansion does not appear to be included in the current budget proposal.
- Help employers administer the automatic IRA program by temporarily doubling the small employer pension plan startup credit to up to $1,000, from $500.
- Exempt an individual from the
The administration has posted the materials describing the budget proposal at http://www.whitehouse.gov/omb in the middle of the page, under the heading THE PRESIDENT'S BUDGET.
The provisions are part of a $3.7 trillion budget proposal. Administration officials are projecting that the federal budget deficit would exceed $1 trillion for the fourth straight year in 2012, then fall to lower levels by mid-decade.
Administration officials are calling for reducing the current growth in the federal deficit by $1.1 trillion over 10 years by cutting spending and adding many "revenue raisers," such as a provision for increasing the amount of taxes paid by married couples with more than $250,000 in annual income.
Like the budget proposals that President Bush released during the years when Democrats controlled the Senate, the budget proposal is being greeted more as the opening move in a game of budget chess than a document that will have much to do with the budget ultimately adopted.
But insurance groups are not taking anything for granted. Five groups - the Association for Advanced Life Underwriting, Reston, Va.; the American Council of Life Insurers, Washington; GAMA International, Falls Church, Va.; the National Association of Insurance and Financial Advisors, Falls Church; and the National Association of Independent Life Brokerage Agencies, Fairfax, Va. -- have joined to blast the life insurance-related provisions.
The groups note that businesses use COLI to protect against losses stemming from the death of owners, keep businesses going after owners die, and fund employee and retiree benefits.
"The COLI proposal would impose new taxes on life insurance used by businesses small and large," the groups say in their statement.
Congress affirmed the the current tax treatment of COLI in bipartisan legislation enacted in 2006, the groups say.
The other revenue raiser aimed at life insurance, the cut in the dividends-received deduction (DRD), would undercut longstanding rules regarding the DRD that are designed to prevent double taxation of corporate earnings, the groups say.
"With our economy still recovering from the recent crisis, public policy should encourage families and businesses to responsibly plan for their financial futures," the groups say. "The administration's budget proposal would have the opposite effect. Congress rejected the same proposals last year. We urge the administration to withdraw its proposals on COLI and DRD."