The bill includes the COLI provision which preserves the tax exemption for COLI death benefits for employer-owned life insurance in the following situations (reflecting the best practices of the life insurance industry): (a) where the notice and consent requirements of the proposed legislation are met; (b) where the insured individual was an employee at any time during the 12-month period before the insured's death or, at the time the contract was issued, was a director or highly compensated employee or highly compensated individual.

The term "highly compensated employee" is determined under the same rules in section 414(q) that apply to qualified plans (without regard to the top-paid 20% rule) and the definition of highly compensated individual is defined using the definition for self-insured medical reimbursement plans under section 105(h) (determined by substituting the highest-paid 35% of employees for the highest paid 25% of employees).

The notice and consent rules are met if, before issuance of the contract, (1) the employee is notified in writing that the policyholder intends to insure the employee's life and of the maximum face amount that the employer might take out on that life, (2) the employee provides written consent to being insured under the contract for coverage that may continue after the insured terminates employment, and (3) the employee is informed in writing that an applicable policyholder (e.g., the employer) will be a beneficiary of any proceeds payable on the death of the employee.

The bill also requires annual reporting and record keeping for COLI policies. The information to be reported includes the number of employees insured under the COLI contract, the total amount of insurance in force and a statement that valid consent has been obtained for each insured or, if such consents were not obtained for all employees, the total number of insured employees for whom such consent was not obtained.

The COLI provisions are generally effective for contracts issued after date of enactment, except for contracts issued after that date pursuant to a tax-free section 1035 exchange. Material increases in the death benefit or other material changes will generally cause a contract to be treated as a new contract (with an exception for existing lives under a master contract).

Because of Congressional concerns regarding PBGC funding and expiring provisions affecting pension plans, it is likely that Congress will attempt to pass pension legislation this year. Since the provisions on nonqualified deferred compensation are likely to be in both the Senate and House versions, these may well be included in the final legislation. Because the COLI provisions are likely to be in at least the Senate version and have broad support in the House Ways and Means Committee, those provisions also stand a reasonable chance of enactment as part of the pension legislation or other legislation moving this year.

Source: AALU Washington Report 05-80