Camp Tax Reform Plan Spotlights Urgent Need for Lawmaker Education

The Camp tax reform discussion draft—proposed by House Ways & Means Committee chair Rep. Dave Camp (R-MI)—underscores an urgent need for NAIFA members to continue their ongoing effort to educate Congress about the value and need to maintain current tax rules governing life and health insurance, retirement savings, and employee benefits. The 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 carriers.  Some experts project that the Camp tax reform draft would stimulate economic and jobs growth—but it does so at a hefty price to retirement savings and financial security.
Virtually all the proposals in the Camp draft are changes that would dramatically increase life insurance company, agent and/or policyholder tax bills. Or, they substantially increase the cost of doing business as an insurance agent/advisor. Thus, the need for lawmaker education is particularly acute.
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 is the May 20-21 Congressional Conference in Washington, D.C.
The Congressional Conference will bring together agents and advisors from all over the country to educate their own lawmakers about the serious adverse impact of the Camp tax reform plan as currently drafted. 
Last year’s Congressional Conference, with over 90% of Congress visited (as well as other days on the Hill in connection with NAIFA meetings, the Secure Family Coalition, and agent-company joint efforts), demonstrated just how effective this constituent lobbying is —the Camp tax reform plan does not suggest a new, direct tax on life insurance or annuity cash values—and that is largely attributable to this kind of grassroots effort. We need to harness that “power of home” again, to defeat the adverse proposals the Camp plan does contain. 
The Issues: The proposals are complex, but their results are simple—they hurt! Nearly $225 billion comes from adverse changes to retirement savings. Another $87 billion in new revenue would come from certain market changes, and insurance product and company taxes. And some $272 billion comes from changes to the cost of doing business.
The Camp draft effectively repeals Section 409A by requiring that benefits be subject to a significant risk of forfeiture, which would essentially wipe out nonqualified deferred compensation arrangements. Those arrangements—usually constructed around life insurance—are the foundation of many middle-management professionals’ retirement planning. A person’s eyes may glaze over at the sound of “pro rata interest disallowance rules”—but this COLI (company owned life insurance) proposal would almost certainly 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/annuity policy. Enactment of these changes would inevitably reduce every policy’s performance.  And, the Camp draft hits hard the deduction 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 is equivalent to reducing the allowable contributions by 20% over time; the repeal of traditional IRAs; and, the proposal to cut in half the annual pre-tax contribution limit (the other half would get Roth treatment—after-tax contribution with tax-free distribution post-retirement)—all serve to dis-incentivize 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 draft significantly reduces a business person’s deduction for advertising expenses. And once again, the proposal is complex—half of all advertising expenses would have to be amortized—i.e., spread out over 10 years rather than taken in the year the expense is incurred.
Lawmakers need to understand how adverse the Camp tax reform draft is to risk protection and retirement security. Please join your colleagues in delivering this message during NAIFA’s Congressional Conference May 20-21 in Washington, D.C. 
  • Posted April 2, 2014 IN

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