ACLI Urges Changes in Proposed Welfare Benefit Fund Regs


The American Council of Life Insurers (ACLI) has submitted comments on the proposed regulations regarding the availability of the section 419A(f)(6) exception for a welfare benefit fund that's part of a 10-or-more-employer plan.

Document Type: Public Comments on Regulations

Tax Analysts Document Number: Doc 2002-23929 (3 original pages) [PDF]

Tax Analysts Electronic Citation: 2002 TNT 208-79

Citations: (17 Oct 2002)


=============== SUMMARY ===============


Laurie D. Lewis and Mark A. Canter of the American Council of Life Insurers (ACLI), Washington, have submitted comments on the proposed regulations (REG-165868-01) regarding the availability of the section 419A(f)(6) exception for a welfare benefit fund that's part of a 10-or-more-employer plan.

According to Lewis and Canter, the ACLI has serious concerns that some of the proposed changes in the regs unnecessarily preclude the use of cash value life insurance to fund a plan's benefits. They assert that "there is no indication in section 419A(f)(6) or its legislative history that such policies should never be permitted in connection with these plans." And, they say, there are no court decisions holding that the use of cash value life insurance is presumptively inappropriate.

The ACLI is also concerned about the effective date of the proposed regs -- for contributions paid or incurred in tax years of an employer beginning on or after July 11, 2002. The authors urge that a more appropriate effective date be specified and that "a more meaningful and administrable grandfather provision be incorporated in the regs.


=============== FULL TEXT ===============

October 17, 2002

CC:ITA:RU (REG-165868-01)
Internal Revenue Service
Courier's Desk
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Proposed Regulation 1.419A(f)(6)-1;
REG--165868--01

Dear Sir/Madam:

[1] On behalf of the member companies of the American Council of Life Insurers, we are submitting comments on the proposed regulations regarding the availability of the section 419A(f)(6) exception for a welfare benefit fund that is part of a 10 or more employer plan. The American Council of Life Insurers is the primary trade association representing the life insurance industry. The 399 member companies of the ACLI account for 76 percent of the life insurance premiums in the United States among legal reserve life insurance companies. In addition, their assets represent 75 percent of all United States life and health insurance companies. A number of our member companies issue life insurance contracts that are used in connection with funding of welfare benefit plans.

[2] As an initial matter, we would like to acknowledge the substantial time and resources that the Department of Treasury and the Internal Revenue Service have given to this matter. We appreciate the scope of this undertaking and the considerable effort that has been made to establish meaningful guidelines to determine when welfare benefit plans covering 10 or more employers will not qualify for the section 419A(f)(6) exception on funding limitations. However, we have serious concerns that certain of the changes proposed in these regulations unnecessarily preclude the use of cash value life insurance to fund a plan's benefits. There is no indication in section 419A(f)(6) or its legislative history that such policies should never be permitted in connection with these plans. Moreover, there are no Court decisions involving section 419A(f)(6) plans that have held that the use of cash value life insurance is presumptively inappropriate. Rather, the Courts have looked at the specific facts in each case and made their decisions based on those facts -- something that these proposed regulations do not do.

[3] In many instances, the use of cash value whole life insurance policies is the most cost effective method to provide death benefits for covered employees. Unfortunately, application of the rules contained in the proposed regulations regarding the definition of an experience rated plan and the treatment of life insurance policy cash values effectively appears to preclude the use of anything but one year term insurance to fund death benefits.

[4] Of particular concern in these proposed regulations is the effective date. The new rules are to be effective for contributions paid or incurred in taxable years of an employer beginning on or after July 11, 2002. As a rationale, the preamble to the proposed regulations indicates that they merely "clarify the situations in which a plan maintains experience-rating arrangements with respect to individual employers for purposes of section 419A(f)(6). We take issue with this assertion and urge that a more appropriate effective date be specified. The "special rules" related to the treatment of insurance contracts mark a significant expansion of the concepts set forth in existing law, cases and the analysis set forth in Notice 95-34. New, more restrictive definitions of basic items such as the treatment of the value of insurance contracts as assets of the fund and the definition of nonstandard benefit triggers go beyond what taxpayers could expect under current law.

[5] In recognition of these difficulties, the proposed regulations purport to provide a limited "grandfather" provision for plans entered into prior to July 11, 2002 that met "existing law, including the analysis set forth in Notice 95-34 and relevant case law." In effect, this provision only addresses contributions by such plans through their first tax year ending on or after July 11, 2002. All future contributions will be subject to new requirements. Such a limited grandfather rule would be extremely detrimental to plans that under current rules validly utilize life insurance contracts other than one-year term plans. Failure to pay required annual premiums on such plans could in many instances cause the policies to lapse, resulting in a loss of benefits or values to the plan. This result is uncalled for and unnecessary.

[6] We strongly urge that the proposed regulations incorporate a more meaningful and administrable grandfather provision. For example, such a provision might apply to the contributions of plans or arrangements entered into on or after the date the regulations become final. Plans entered into prior to that date should be grandfathered under existing law (including the guidelines of Notice 95-34). We are not suggesting that the Service give a blanket approval of all pre-existing plans; rather, existing plans should be subject to Service scrutiny based on the law that existed when they were entered into. Such an effective date approach was recently put forth by the Department of the Treasury and the Internal Revenue Service in connection with proposed regulations on split-dollar life insurance arrangements.1 This approach would prevent undue economic losses to existing plans that comply with existing law, especially those plans that utilize level premium and cash value life insurance policies. Grandfathered plans and arrangements would still be subject to the strictures of existing law, as well as the extensive requirements set forth in Notice 95-34.

[7] In 1996, Congress enacted the Taxpayer Bill of Rights 2, "TBOR2." Section 1101 of TBOR2 amended section 7805(b) of the Code to provide that, with limited exceptions, temporary, proposed, or final regulations could not be effective prior to the date on which the regulation is filed with the Federal Register or the date on which any notice substantially describing the expected contents of any regulation is issued to the public. While these proposed regulations indicate that they will only apply to "new" contributions, effectively this is tantamount to having them apply to pre-existing arrangements. As such, they are contrary to the prohibition against retroactive regulations.

[8] Thank you for your attention to these issues. Please contact either of the undersigned if you have any questions regarding these comments.

Sincerely,

Laurie D. Lewis
American Council of Life Insurers
Washington, DC

Mark A. Canter
American Council of Life Insurers
Washington, DC

FOOTNOTE


1[REG-164754-01] 67 Fed. Reg., at 45422.


END OF FOOTNOTE

 



Code Section: Section 419A -- Qualified Asset Account Limits
Geographic Identifier: United States
Subject Area: Benefits and pensions
Insurance company taxation
Industry Group: Insurance
Cross Reference: For a summary of REG-165868-01, see Tax Notes, Jul. 15, 2002, p. 362;
for the text, see Doc 2002-16302 (13 original pages) [PDF], 2002 TNT 135-
12 , or H&D, Jul. 11, 2002, p. 378.
Author: Lewis, Laurie D.; Canter, Mark A.
Institutional Author: American Council of Life Insurers