The Camp Tax Reform Discussion Draft – proposed by House Ways & Means Committee Chair Rep. Dave Camp, R-Mich. – underscores an urgent need for NAIFA members to continue their ongoing efforts to educate Congress about the value of and need for current tax rules that govern life and health insurance, retirement savings, and employee benefits.
The Camp Draft extracts more than $583 billion (over 10 years) from almost 50 proposals that directly or indirectly impact the insurance industry. The adverse revenue impact hits customers, agents and insurance carriers. Some experts project that the Camp Draft would stimulate the economy and fuel jobs growth, but it comes with a hefty price for the retirement savings and financial security of many Americans.
Virtually all the proposals in the Camp Draft are technical changes that would dramatically increase life insurance company, agent and/or policyholder tax bills or substantially raise the cost of doing business as an insurance agent or advisor. Thus, the need for lawmaker education is acute.
NAIFA’s Congressional Conference
NAIFA, in conjunction with allied trade associations and insurance companies, is strategically responding to this threat. Among the most important of these responses was the 2014 NAIFA Congressional Conference held last month in Washington. The conference brought together agents and advisors from all over the country to educate lawmakers about the serious adverse impact of the Camp Draft as it is currently written.
During the 2014 Congressional Conference, NAIFA members visited over 90 percent of their congressional officials. They also spent days on Capitol Hill in NAIFA meetings, with the Secure Family Coalition, and in joint efforts with other agents and companies. These initiatives demonstrated the power and effectiveness of constituent lobbying.
The Camp Draft does not suggest a new, direct tax on life insurance or on annuity cash values – and that is largely attributable to this kind of grassroots effort.
NAIFA will again use the strength of constituent expertise to defeat the adverse proposals of the Camp Draft.
Impact of the Proposals
The proposals are complex, but their results are simple – they hurt! More than $85 billion in new revenue would come from insurance product and company taxes. Another $225 billion would come from adverse changes to retirement savings, and some $272 billion would come from changes to the cost of doing business.
It may not be intuitive to see a proposed repeal of Internal Revenue Code (IRC) Section 409A with its policy based on constructive receipt as a significant threat. But in fact, these proposals would essentially wipe out nonqualified deferred compensation arrangements. These arrangements – usually constructed around life insurance – are the foundation of many a middle-management professional’s retirement planning.
And even though one’s eyes may glaze over at the sound of “pro rata interest disallowance rules,” this company-owned life insurance (COLI) proposal would restrict, to the point of eliminating, virtually all company uses of life insurance.
The list goes on. The Camp Draft proposes changes in how life insurance companies calculate the deductions they take for reserves. These reserve deductions mirror the cash values inside each life insurance or annuity policy. Enactment of these changes inevitably would reduce every policy’s performance.
And the Camp Draft hits hard at the deduction that insurance carriers take for the commissions they pay their agents (the deferred acquisition cost [DAC] proposal). Inevitably, if enacted, these proposals would either hurt policy performance or reduce agent compensation.
The hits to retirement savings are numerous:
A 10-year freeze on cost-of-living adjustments, which is equivalent to reducing the allowable contributions by 20 percent over time.
The repeal of traditional individual retirement accounts and the proposal to cut in half the annual pretax contribution limit (the other half would get Roth treatment – after-tax contribution with tax-free distribution post-retirement).
All of these serve to disincentivize employers from offering plans. The revenue from switching to Roth treatment doesn’t account for the revenue lost from tax-free distributions in the “out years.”
There are also many business proposals that hurt. For example, the Camp Draft significantly reduces a businessperson’s deduction for advertising expenses. And once again this proposal is complex, but half of all advertising expenses would have to be “amortized” – i.e., they would have to be spread out over 10 years instead of being taken in the year the expense is incurred.