New IRS COLI Rules

[Take 2]

IRS Creates COLI Safe Harbor For Insurers BY ALLISON BELL NU Online News Service, Sept. 12, 2007

The Internal Revenue Service has come out with guidelines to help insurers apply insurance company proration rules to corporate-owned life insurance.
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Current tax rules let insurers deduct increases in insurance reserves and “tax-favored income,” such as intercorporate dividends, from taxable income, IRS officials write in the revenue procedure.

“The insurance company proration rules require that tax-favored income be prorated between the insurance company and its policyholders,” officials write.

Before 1997, insurers had to apply the proration rules only to tax-exempt interest and intercorporate dividends, but the Taxpayer Relief Act of 1997 required insurers to apply the proration rules to increases in the cash values of some life insurance policies and annuity contracts.
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IRS officials have responded by developing a safe harbor for insurer COLI contracts covering no more than 35% of the officers, directors, employees and “20% owners” of an insurer.

The safe harbor provision states that, for purposes of applying the proration rules, “an insurance company is not required to take into account any portion of the increase for the taxable year in the policy cash values…of I-COLI contracts to which this revenue procedure applies pending the publication of additional guidance.”
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A copy of the revenue procedure is available here. http://www.irs.gov/pub/irs-drop/rp-07-61.pdf

http://www.lifeandhealthinsurancenew...fe%20Insurance

So how does this affect the current COLI business?

[CDesRochers]

The IRS had originally taken the position that section 264(f), which was written in response to Fannie Mae and others writing COLI on debtors, applied the adjustment to the proration rules to all life insurance company COLI, even that on employees. There was a fair amount of criticism of that position, particualrly given that Congressional intent seem to be only to apply the rules to non-employee COLI. This is a way to allow insurance companies to hold COLI on their employees while still providing that IRS was correct on the technical interpretation of the statute. At least thats how I read it.

Chris