Federal Roundup

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Tax Reforms
The partisan debate over the budget and reducing the national debt continues. Policymakers are looking at all tax policy, and we know life insurance and annuity tax treatment is viewed as an “expense” in D.C. We continue to hear that all tax policy will be on the table this year. Indeed, recently, former Secretary of Treasury, Larry Summers recently stated that lawmakers “should acknowledge that every tax expenditure or special break has to be on the table.” There were a number of significant developments in February:

  • February 2, the Treasury Department released proposed rules on retirement security to help retirees have a guarantee income late in retirement. These rules would modify IRA and pensions rules to help promote the use of “qualified annuity contracts (QLAC).” While NAFA is generally encouraged that the benefits of annuities are being recognized, we are concerned that the proposed QLAC definition appears to excludes the use of FIAs.
  • February 2nd, the Council of Economic Advisors released a supporting white paper on retirement needs that among other topics touted the benefits of annuities, especially deferred annuities, as a products that can help America workers “mitigate some of the risk” they will face in retirement, especially the “risk of outliving assets.” This report encourages the expansion of annuities to be offered. Furthermore, the report noted that deferred annuities are “utilized due to the tax-advantages.”
  • February 13, the President released the 2013 budget which contained recommendations to modify the proration rules for life insurance company general and separate accounts, to expand the pro rata interest expense disallowance for corporate-owned life insurance, to expand information reporting required for private separate accounts of life insurance companies, and modify rules that apply to sales of life insurance. We do not expect any significant action in the near future on these recommendations, but will be actively monitoring.
  • February 22, the President released a “Framework for Business Tax Reform” that included the following recommendation:
    Reform treatment of insurance industry and products. The tax code currently allows insurance to be used as a form of tax shelter for major corporations. In particular, corporations can invest in life insurance for their officers, directors, or employees, benefit from “inside build up” (gains on that investment) that are tax-deferred or never taxed, and finance that investment through debt that allows the corporation to take interest deductions earlier than any gain realized on the life insurance. 

The Framework would close this loophole and not allow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business. The Framework would also make a number of other reforms to the treatment of insurance companies and products to improve information reporting, simplify tax treatment, and close loopholes.

SEC Uniform Fiduciary Standards
NAFA continues to monitor any SEC actions to impose a uniform fiduciary duty on broker-dealers’ and investment advisors’ authority granted under Section 913 of the Dodd-Frank Act. Reportedly, the SEC plans to seek additional information about the impact of such a standard on the provision of investment advice before releasing a proposed rule. SEC Chairman Shapiro will be testifying before the House on March 6 regarding the 2013 budget, so perhaps we may learn more.

Joint SEC/CFTC Definition of Swaps Final Rule
Recently, CFTC Chairman Gary Gensler presented testimony saying that the final joint rule that further defines “swaps” should be released by this spring. Last year NAFA submitted comments on a proposed a joint SEC and CFTC rule that would generally subject annuity products, as well as many insurance products, to federal regulation as “swaps.” This proposed rule is contrary to clear Congressional intent in the Dodd-Frank Act that insurance products not be treated as “swaps.”

DOL Fiduciary Rule
The Department of Labor has requested data from the industry about IRAs in an effort to help shape its reproposed fiduciary rule. The extensive nature of the data requested has been challenging for the industry which had until February 24 to provide information. Reportedly, the DOL is frustrated with industry efforts, but recently reconfirmed that it hopes to publish a new rule in May. NAFA will continue to actively work this issue, and in particular, is focused on exclusion of IRAs from the new rule as well as obtaining a meaningful seller’s exception.

The new Federal Insurance Office (FIO) created by the Dodd-Frank Act is still in the process of preparing a report on how the current system of insurance regulation might be modernized and improved. Once released, NAFA will be carefully analyzing the FIO report and will take whatever responsive actions are deemed necessary.

NAFA, the National Association for Fixed Annuities, is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities. NAFA is the only association whose sole purpose is advocating for the fixed annuity product.

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