Monthly LRA Update: April 2007

LEGISLATIVE DEVELOPMENTS

Proposed House Bill Regarding Nonqualified Deferred Compensation Plans

Despite the testimony in the House Ways and Means Committee opposing the proposed $1 million cap on amounts deferred (and growth thereon) in nonqualified deferred compensation plans in SB 349 (introduced in January), HB 1591, introduced on 3/29/07, contains similar language. We have not yet heard from industry organizations, et al. regarding its prognosis going forward. We will continue to monitor.

TAX DEVELOPMENTS

IRS Private Letter Ruling Regarding Partial Exchanges under Section 1035

Another significant development came by way of publication of IRS private letter ruling (PLR) 200711014. Essentially, the policyholder wanted to confirm that an exchange of a “partial block” of existing policies would qualify for treatment under section 1035 (and not be considered a partial exchange). PLR 200711014 concludes that a partial block of policies (e.g. those covering the lives of remaining active employees) can be exchanged. This interpretation allows corporations to retain policies on terminated or retired employees within an overall block of policies while exchanging those on actives, thereby avoiding potential 264(f) loan interest disallowance (as asserted by the IRS in PLR 200627021). The BOLI Tax Report prepared by Davis & Harman provides an excellent summary of the most recent PLR along with explanations regarding other recent PLRs we have addressed in prior monthly updates.

IRS Publishes Priority Guidance Plan

On March 12, 2007, the IRS published an update to its Priority Guidance Plan (adding 59 items). We are reviewing the plan for insurance and employee benefit related topics that may impact clients.

OTHER DEVELOPMENTS

FASB Reaches Consensus on EITF 06-10

FASB reached consensus on EITF 06-10 during its March 15 meeting. EITF 06-10 applies similar logic to accounting for collateral assignment split dollar plans as that espoused under EITF 06-4 with respect to endorsement split dollar. It was expected to be ratified by FASB on March 28 (not yet reflected on FASB’s website). The AALU Bulletin provides a synopsis of the EITF along with a brief recap of its history.

AALU also reported that final regulations under 409A are expected to be issued in the coming weeks.