Senate To Consider Revised COLI Tax Treatment Rules

by Leroy Baker, Tax-News.com, New York

22 January 2004

A compromise bill which proposes to limit the tax breaks received by firms on corporate-owned life insurance policies (COLI) taken out on workers has been released in a discussion draft by Senate Finance Committee Chairman Charles Grassley.

Under current rules, firms do not have to pay tax on the proceeds accruing from life insurance policies taken out on their employees. This system has been criticized by many, as this often happens without the employee’s knowledge, and frequently continues after the employee has left the company. Critics argue that this represents an unfair subsidy to corporations.

The proposed changes originally tabled by Senator Jeff Bingaman (D - New Mexico), would have made firms pay taxes on COLI proceeds if the insured person had left the company for more than one year before their death. Although this was initially approved by the Senate last September, the Finance Committee has since written in some additional requirements.

If enacted, the revised version proposes that COLI proceeds will remain tax-free if the employee is a ‘key person’ - defined as a ‘highly compensated' employee or individual with a salary in the top 35% for the employer, or is a director of the company.

Furthermore, an additional requirement stipulates that, in all cases, the employee must receive written notice of the insurance coverage, which they must consent to in writing.

However, Bingaman has expressed dissatisfaction with the revised bill: "Unfortunately, this proposal does nothing to close a loophole that allows companies to get tax breaks on life insurance policies they have on employees who don't work for them anymore," he observed in a statement.

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