Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

FINANCE COMMITTEE APPROVES BILL TO PREVENT USE OF NEW LIFE INSURANCE POLICIES TO FUND EXECUTIVE RETIREMENT PLANS

September 18, 2003

If the Senate Finance Committee has its way, corporate life insurance policies purchased starting today will lose much of their allure as a way to fund executive retirement plans.

According to Tax Analysts, a provision passed yesterday by the Committee makes death benefits on corporate-owned life insurance policies taxable if the insured employee has not worked for the company in the year preceding death. Death benefits used to purchase the employee's interest in the company would remain tax-exempt. These provisions would apply to policies purchased after September 17, 2003.

The tax exemption for death benefits is important to the economics of life insurance policies. If the provision survives to be passed by the full Senate and is eventually signed into law, businesses looking to use life insurance to fund executive retirement plans will find their task to be much more complex. Life policies under the new rules would function much like annuities, with policy earnings tax-deferred until maturity.

While insurance proceeds would become taxable to corporations under this bill, they would remain tax-free to other beneficiaries, such as family members of the insured.

SEPTEMBER 18 EFFECTIVE DATE: WHAT TO DO?

The provision has a long way to go before it becomes law; it would have to be approved by the full Senate and the House of Representatives.

Still, the September 18 effective date is a red flag for companies considering new policies. Corporations looking at new policies on executives - especially single-premium arrangements - should pause to evaluate this legislation before proceeding.

The September 18 effective date grandfathers existing policies, so no action is required for arrangements already in place. Taxpayers considering any policy changes should make sure that they don't endanger their ability to qualify under this grandfather clause.

We will link to the bill text as it becomes available.

      Bookmark: del.icio.us • Digg • reddit