May 2009


The Obama Administration’s 264(f) Proposal

As we reported in an Ad Hoc LRA, on May 11th, the Obama Administration 2010 budget proposals which would effectively inhibit substantially all new COLI/BOLI purchases.  The proposal accomplishes this by removing the current 264(f) exception for policies covering the lives of individuals who at the time first covered are employees, officers and directors.  The proposal, as drafted, will be effective on a prospective basis for insurance contracts [purchased/issued] after December 31, 2010. Therefore, existing/current BOLI/COLI policies would be fully grandfathered and not subject to this provision.  It is unclear whether grandfathered BOLI/COLI policies could be exchanged for new insurance policies and retain the grandfathered treatment.  This is not the first time a Code amendment of this nature has been proposed and it is too early in the legislative process to predict the outcome of this proposal.  Needless to say, there will be concerted efforts by industry trade groups and other interested parties to negate any such legislation; but unlike in many earlier instances, the present climate may make such efforts less likely to succeed.


H.R. 2609 – The Insurance Information Act of 2009

On May 22nd, House Representative Paul Kanjorski (D-PA) reintroduced an Office of Insurance Information bill.  As laid out in H.R. 2609, the Office of Insurance Information would: collect and analyze data on insurance; advise the Treasury Secretary on major domestic and international policy issues; report to Congress every two years; establish federal policy on international insurance matters; and ensure that state insurance laws remain consistent with federal policy in coordinating international trade agreements.  In the 110th Congress, the 2008 version was initially fast tracked but eventually was stalled and died in the House.


S. 896/H.R. 1106 – Helping Families Save Their Homes Act of 2009

The House bill H.R. 1106 had a lot of momentum and contained a mortgage cramdown provision that would allow bankruptcy judges to modify principal balances of residential mortgages.  A similar bill without the cramdown provision was introduced in the Senate (S. 896) and the Senate voted against an amendment to include a cramdown provision.  The final version passed both houses of Congress and was signed into law on May 20th – absent the cramdown provision.



TALF Expansion to CMBS

At the beginning of the month, the Federal Reserve Board announced it would expand the range of acceptable collateral under the Term Asset-Backed Securities Loan Facility (TALF) to include newly issued commercial mortgage-backed securities (CMBS) starting with the June subscription.  Last week the Board announced that, starting in July, certain high-quality commercial mortgage-backed securities issued before January 1, 2009 (legacy CMBS) will become eligible collateral under the TALF.  It is hoped that CMBS inclusion in TALF will aid in bringing much needed stability to the sector.


TARP to Insurers

By May 15th, six insurers had announced that they received preliminary approval for their Capital Purchase Program (CPP) applications.  These insurers include Allstate, Ameriprise Financial, Hartford Financial, Lincoln Financial, Principal Financial and Prudential.  Actual Treasury investment is subject to final negotiations and approval.  As of today, only two insurers have released statements on whether they will accept or decline the funding – Allstate and Ameriprise both declined to participate in the program.  Earlier CPP investments took place within fairly expeditious timelines, generally around 30 days; so final word on who will accept or reject funding is expected in the coming weeks.


Systemic Risk: How Should Insurance Be Regulated?

In June, Congress is expected to hold hearings on the financial regulatory reform outlined by the Treasury which includes addressing systemic risk.  Insurance regulation is at the heart of systemic risk discussions and robust debate.  On May 14th, the House Committee on Financial Services’ Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing entitled “How Should the Federal Government Oversee Insurance?”  Subcommittee Chairman Paul Kanjorski (D-PA) urged Congress to address insurance activities as it creates a new legislative regime to monitor systemic risks.  Included in Congressional Research Service Specialist in Financial Economics Baird Webel’s written testimony were seven options for Congress to consider: 1) doing nothing; 2) creating a federal Office of Insurance Reform; 3) harmonizing state laws via federal preemption; 4) creating a federal systemic risk regulator; 5) creating a federal solvency regulator; 6) establishing a federal insurance charter; and 7) reforming the complete financial services regulatory system.

While legislation has been proposed from every school of thought, the momentum for Congress to act on systemic risk has perhaps never been greater.  Proponents of the current state insurance regulatory framework have launched robust advocacy for the existing state-based system.  This month, the National Conference of Insurance Legislators (NCOIL) and the National Association of Insurance Commissioners (NAIC) have written letters, attended hearings and held meetings with congressional members regarding the role of state regulators in addressing systemic risk.  These same groups have been very vocal in their opposition of H.R. 1880 (Optional Federal Insurance Charter Bill) and any other measure that would weaken or eliminate the state-based regulatory framework.

The Committee on Capital Markets Regulation, a bipartisan group, issued a report on May 26 calling for the creation of a Financial Services Authority; this new agency would replace all or parts of the OCC, the OTS, the FDIC and the SEC, and effectively oversee all aspects of the financial system.  Among the report’s 57 recommendations are increasing the Federal Reserve Board’s authority (e.g., supervising all systemically important financial institutions), and increasing CDS oversight.



New IRS Guidance on BOLI/COLI

Just prior to the Memorial Day holiday weekend, the IRS issued Notice 2009-48 which provides significant new guidance under Revenue Code sections 101(j) and 6039I (aka the COLI Best Practices Act).  The guidance is set out in a question and answer format.  The Pension Protection Act of 2006 added section 101(j) to the Code and provides that death benefits paid under an employer-owned life insurance policy are taxable, unless a specified exception applies and certain notice and consent requirements are fulfilled.

There were 17 questions addressed.  Below are a few of the more significant topics covered:

  • Q&A 1: The Notice provides that life insurance is “employer owned” only if the owner is engaged in a trade or business.  Therefore life insurance owned by non-business entities, such as qualified plans or VEBAs, is not employer owned and is not subject to section 101(j).
  • Q&A 4: Notice and consent requirements must be met before the policy is issued.  For consent and notice requirements, a policy is considered issued on the later of 1) the date of application for coverage, 2) the effective date of coverage or 3) the formal issuance of the policy.  Hence, the requirement may be fulfilled during the period between application and policy issue.
  • Q&A 10: A single consent can cover multiple policies (i.e., without expressly stating multiple policies will be purchased).
  • Q&A 11: The notice and consent requirements can be satisfied electronically.
  • Q&A 12: The employee must be notified of the actual maximum face amount of life insurance either in dollars or as a multiple of salary (emphasis added).
  • Q&A 13: The IRS will not challenge the applicability of an exception under 101(j) based on an inadvertent failure to satisfy the notice and consent requirements if the following conditions are met: 1) the policyholder made a good faith effort to satisfy requirements, 2) the failure to satisfy requirements was inadvertent, and 3) the failure was discovered and corrected no later than the due date of the tax return for the taxable year.
  • Q&A 15: Post-101(j) policies in a section 1035 exchange for pre-101(j) policies are not subject to section 101(j) if the exchange does not result in a material change (other than a change in issuer). A material increase in death benefits or other material change is treated as an issuance of a new contract.
  • Q&A 16: Regarding section 1035 exchanges, no further notice and consent are required if either 1) the existing consent remains valid or 2) the exchange does not result in a material change in the death benefit or other material change in the contract.

The Notice is effective June 15, 2009, but the IRS states that it will not challenge a taxpayer who made a good faith effort to comply with section 101(j) based on a reasonable interpretation of that provision before the effective date.


Revenue Rulings on Life Settlement Transactions

This month the IRS issued two Revenue Rulings addressing certain tax aspects of sales and surrenders of life insurance policies: Rev. Rul. 2009-13 and Rev. Rul. 2009-14.  While the guidance was specifically directed toward life settlements, it covers some important tax matters that may arise in other contexts.



Congress Asked to Revisit Mark-to-Market

On May 14th, five banking and insurance organizations wrote a letter to the House Committee on Financial Services asking Congress to revisit mark-to-market (MTM) accounting despite FASB’s recent accounting guidance.  In the letter, the organizations asserted that recent changes, while helpful, did not adequately resolve the gamut of flaws with MTM accounting.  Among the examples of ongoing flaws cited in the letter was the definition of “fair value” as the “exit price,” higher losses for U.S. companies accounting for “other than temporary impairment” versus companies that follow international accounting standards and MTM generally not being the most relevant measurement basis for many types of transactions.




Johnson v. Amegy Bank, N.A.

On May 11th, Amegy Bank filed its Answer with the Harris County District Court generally contesting the facts and allegations raised by the plaintiff.  According to the Notice of Removal, the case involves a split dollar life insurance policy that qualifies as a “welfare benefit plan” subject to ERISA.  Since any claims in connection with the policy would be preempted by ERISA, Amegy Bank filed the notice of removal to federal district court in the 5th Circuit.  [Case No. 2009-11226 127th Judicial District Court, Harris County, Texas (Feb. 23, 2009)]


Barofsky v. Citibank, N.A.

In our January LRA, we mentioned that The Clearman Law Firm (Houston, TX) announced a nationwide investigation of banks that purchased “secret” life insurance policies.  At this time, we are unaware of any lawsuits filed as a result of the firm’s “investigation.”  However, the Johnson v. Amegy Bank plaintiffs’ lawyers, McClanahan, Myers Espey, LLP filed a lawsuit last month in Nevada federal court against Citibank.  Unlike the recent consent and identity misappropriation BOLI/COLI lawsuits filed by McClanahan, this suit challenges whether an employer has insurable interest in the lives of their employees under South Dakota state statute as well as twelve other state statutes including Florida, Louisiana, Oklahoma and Washington.


Wal-Mart COLI Lawsuits Updates

The McClanahan firm is also plaintiffs’ attorney for a number of COLI related lawsuits against Wal-Mart Stores, Inc.  Earlier this week in Atkinson v. Wal-Mart Stores, Inc., a federal judge rejected a bid for class certification and dismissed a lawsuit alleging that Wal-Mart used employees’ personal information without their consent to purchase COLI policies and unjustly enriched itself by collecting death benefits.  The district court judge ruled that the plaintiff lacked standing to bring the suit as neither Florida law, the Florida Insurance Code, nor federal law seemed to indicate a written consent requirement until after August of 2006 when Congress passed the Pension Protection Act.  Further the denial of class certification also meant that the controversy amount was below the $75,000 threshold for federal jurisdiction.  The plaintiffs’ attorneys are expected to file an appeal.

A similar case, Richard v. Wal-Mart Stores, Inc. was dismissed in Louisiana district court, but that dismissal was reversed by the Fifth Circuit Court of Appeals on February 11, 2009.  Making no judgments on the merits of the case, the appeals court found that a 10-year statute of limitation applied, rather than a one-year statute of limitations and remanded the case to allow the plaintiffs to pursue class certification.  Two other cases in district courts in Oklahoma and Texas have been settled.



BOLI/COLI in the News

This month the Wall Street Journal had two articles on BOLI/COLI.  In a May 20th article, Ellen Schultz, who has authored several articles in the WSJ related to COLI and BOLI dating back several years, continued her prior record of stating multiple inaccuracies.  Once again, she seeks to cast BOLI/COLI in the most negative light possible.

On May 19, John D. McKinnon wrote an article discussing the Obama administration’s tax proposals (including the potential impact on life insurers and COLI/BOLI).  It is noteworthy that this article contradicts Ms. Shultz by correctly stating that the Treasury tax proposal will, if passed, curtail the sales of COLI.  One must wonder whether the editors were taking their Memorial Day holiday early in the case of Ms. Schultz.


BOLI Surrenders and Disclosures

According to its earnings releases and SEC filings, Bryn Mawr Bank Corporation (Bryn Mawr, PA) gave notice in fall 2008 that it was surrendering its separate account BOLI insurance contract which it had purchased the previous summer.  Byrn Mawr’s disclosure indicates that it received $15.6 million in cash on February 9, 2009.  The banks effective tax rate for the third quarter of 2008 was 41.1%, which included $266K of taxes on the cumulative income that had been earned on the BOLI contract from inception until the time of its surrender.

In its SEC 10-Q, Bryn Mawr further stated that it must send a quarterly certification letter, for the next five years, stating that no BOLI contract has been purchased covering the life of a previously insured employee.  This requirement generally arises in connection with receiving a payment from the stable value wrap provider (i.e., the book value received was greater than the market value of the underlying assets).  Based on the values reported, it appears that the net crediting rates under the BOLI policy were relatively low; this may be indicative of poor investment performance within the underlying portfolio(s).


Ad Hoc LRA – May 12, 2009

The Obama Administration’s 264(f) Proposal

We recently learned that the Obama Administration has proposed a number of tax revisions to raise revenue over the next 10 years. These proposals were included in the Treasury’s General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (2009 Greenbook) which was released yesterday. While we are still reviewing the document, we have identified a few sections that may have an impact on COLI/BOLI if enacted.  

Sections of Interest from 2009 Greenbook

  • Require Information Reporting for Private Separate Accounts of Life Insurance Companies (Page 89)
  • Modify Dividends-Received Deduction for Life Insurance Company Separate Accounts (Page 113)
  • Expand Pro Rata Interest Expense Disallowance for Corporate-Owned Life Insurance (Page 115)