February 2014


Tax Reform Act of 2014

On February 26, the House Ways and Means Committee Chairman Dave Camp (R-MI) released draft tax reform legislation (the “Tax Reform Act of 2014”).  The legislation represents a sweeping overhaul of the tax code.  Key objectives include flattening the tax code, reducing the highest marginal personal and corporate rate to 25%, and repealing the AMT.

The proposal has a number of provisions that would significantly impact the insurance industry and a few that would impact BOLI/COLI directly.  Noteworthy insurance-related provisions include the expansion of pro-rata interest expense disallowance under Section 264(f) and an increase in the capitalization of certain policy acquisition expenses for insurance carriers (i.e., the DAC tax).  The 264(f) proposal is the same as what has been included in each of President Obama’s budget proposals.  The President is expected to release his budget proposal within the next week.

The proposal would also effect potentially devastating changes to the tax treatment of non-qualified deferred compensation (NQDC) plans.

Early consensus among Washington analysts is that any sweeping tax reforms are unlikely to progress much, let alone be enacted during an election year.


Kentucky Premium Tax Proposal

On February 3, a state representative in Kentucky sponsored a bill that would limit a local government from imposing a premium tax on single premium BOLI in excess of 0.50%.  Certain municipalities in Kentucky have assessed extremely high premium tax rates for life insurance (causing the overall rate to be as high as 16%).  The premium tax rate assessed at the state level in Kentucky is 1.50%.


Kentucky COLI Insurable Interest Proposal

On February 25, KY House Bill 457 was introduced relating to insurable interest requirements for corporate-owned life insurance within that state.  The intent of the bill is not entirely clear and appears to have a number of questionable elements.  It would add a section to the insurable interest statute that would grant an employer the right to purchase insurance on any employee provided that it satisfies specific notification requirements and that the employee does not opt out of the coverage.  If the employee was to be insured for more than 200% of his/her annual salary, then the bill mandates that 50% of the proceeds must be payable to the employee’s estate.

Seemingly questionable issues with the proposal include:

  1. The eligible employee population does not align with IRS 101(j) requirements that insureds must be highly compensated employees.  Death proceeds for policies covering employees that do not meet the federal requirements would not be exempt from taxation.
  2. The opt-out provision is also at odds with IRS 101(j), which requires that insureds must provide affirmative written consent.

It is also worth noting that Kentucky’s insurable interest statute already acknowledges an employer’s interest in insuring employees “for the purpose of funding a pension or other benefit plan established for the employee of the employer.”



BB&T v. MassMutual Update

In 2009, BB&T initiated a lawsuit against Clark Consulting (the agent/administrator) and MassMutual (the insurance carrier) to recover a portion of losses incurred as a result of an investment allocation in the Falcon Fund (a leveraged, fixed income-only hedge fund).  BB&T had purchased a $112.5 million BOLI policy in August 2006 and had allocated fifty percent of the cash value in the Falcon Fund.  Among other allegations in the complaint, MassMutual failed to take action when automatic reallocation triggers were breached (the first based on the “rolling annualized standard deviation of the monthly gross NAV of the Falcon Fund” exceeding 10% in August 2007; the second based on a one month gross NAV reduction of more than 7% in November 2007).

According to MassMutual’s most recent earnings release, the parties have completed discovery and are preparing for trial, which is likely to take place in 2014.

North Carolina Superior Court (Forsyth County) 09 CVS 4007



IRS Guidance for VEBAs

On February 6, the IRS published new proposed rules regarding Unrelated Business Taxable Income (UBTI) of VEBAs.  UBTI of a VEBA generally is the lesser of two amounts: (1) the investment income of the VEBA for the taxable year (excluding member contributions), and (2) the excess of the total amount set aside as of the close of taxable year (including member contributions and excluding certain long-term assets) over the Code section 419A qualified asset account limit (calculated without regard to the otherwise permitted reserve for post-retirement medical benefits) for the taxable year.

Among other clarifications, the new proposed rules reflect the IRS’s position regarding the computation of UBTI of a VEBA.  Of note, a VEBA may not compute a reduced amount of UBTI based on having spent investment income to pay benefits during the tax year.

Groom Law Group published a memorandum discussing the proposed new rules and a recent IRS PLR regarding the use of a VEBA to avoid imputed income on employee-purchased group term life insurance.



SSA DMF Access – Certification Process Update

As we reported previously, the Budget Act of 2013 included a provision that will restrict access to the Social Security Administration’s (SSA) Death Master File (DMF) for a three year period following the date of death unless a person is certified for ongoing access through a program administered by the Secretary of Commerce.

The Department of Commerce recently released a request for information (RFI) seeking input regarding the implementation of the mandated certification program.  Responses are due no later than 15 days after publication in the Federal Register (i.e., a due date of March 18).

A public meeting will also be held on March 4, from 9AM-12PM ET; the meeting will be webcast.


FASB and IASB Insurance Contracts Project

In 2008, the FASB and IASB agreed to work jointly to revisit accounting requirements for insurance contracts (i.e., for issuers of insurance contracts) as part of several efforts to improve international convergence of accounting principles.  The boards have worked on the project consistently over the past five years and each have released discussion papers and exposure drafts.  Many responders in the US opposed broad changes to GAAP for insurance contracts.

In February, the FASB chose to abandon the more global project and instead will focus on smaller, targeted changes to GAAP.