If the myriad proposals on tax reform issued by House Ways and Means Committee becomes law, then a provision of the current tax code respecting pro rata interest expense disallowances for corporate-owned life insurance would no longer apply to officers, directors or employees.
Falling under Subtitle F of the report, released on Wednesday, the proposed legislation touches variously on corporate-owned life insurance (COLI), life insurers’ net operating losses, deductions for small life insurers, and the computation of life insurance tax reserves. Here’s a recap:
- Section 3501’s exception to a pro rata interest expense disallowance for COLI restricted to 20-percent owners. Under this provision, the exception to the pro rata interest expense disallowance rule would apply only to 20-percent owners of a business that holds the life insurance contract. The provision would be effective for insurance contracts issued after 2014 with any material increase in the death benefit or other material changes to existing contracts being treated as new contracts.
- Section 3502’s provision regarding net operating losses of life insurance companies. Under this provision, life insurance companies would be allowed to carry net operating losses back up to two tax years or forward up to 20 tax years, in conformity with general net operating loss carryover rules. The provision would be effective for losses arising in tax years beginning after 2014.
- Section’s 3503’s provision respecting small life insurance company deduction. The special deduction for small life insurance companies would be repealed under this provision, which would be effective for tax years beginning after 2014.
- Section 3504’s computation of life insurance tax reserves. The current-law prescribed discount rate for life insurance reserves would be replaced with the average applicable Federal mid-term rate over the 60 months ending before the beginning of the calendar year for which the determination is made, plus 3.5 percentage points. The provision would be effective for tax years beginning after 2014.
- Section 3505’s adjustment for change in computing reserves. Under the provision, the special 10-year period for adjustments to take into account changes in computing reserves by life insurance companies would be repealed. As a result, the general rule for making tax accounting method adjustments would apply to changes in computing reserves by life insurance companies. The provision would be effective for tax years beginning after 2014.
- Section 3506’s modification of rules for life insurance proration. Under the provision, the portion of dividends and tax-exempt interest received that is set aside for obligations to policyholders would be determined separately for the company’s general account (which supports non-variable insurance products) and for each separate account (which supports variable life insurance and annuity contracts).
In addition, the formula for determining this portion would be modified so that it compares mean reserves to mean assets of each account (rather than computing the respective shares of net investment income that belong to the company and to the policyholders). The provision would be effective for tax years beginning after 2014.
- Section 3507’s repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account. Under the provision, the rules for policyholders’ surplus accounts would be repealed. The provision would generally be effective for tax years beginning after 2014, and any remaining balances would be subject to tax, payable in eight annual installments.
Congress’ Joint Committee on Taxation estimates the sections of the report covering life insurance would increase revenue by more than $39 billion between 2014 and 2023.