Experts don't expect any immediate curbs on trust-owned life insurance used to fund retiree medical liabilities, even though the IRS is looking into the use of corporate-owned life insurance.
The Internal Revenue Service is reviewing programs in which a company borrows against the life policy and deducts the loan interest from taxable income. Most corporate-owned life insurance policies are written for a group of employees, usually senior executives. Corporations own the policies, pay the premiums and purchase the policies primarily to fund non-qualified benefit plans for executives. Congress may settle the issue before the IRS completes its investigation. A measure approved by the House Ways and Means Committee in September would scrap the tax deductibility of policy loan interest on COLI.
"The IRS is looking at COLI; there is a big difference in that and trust-owned life insurance," said Fred Van Remortal, president of Premit Group Inc., New York. Premit markets TOLI through a proprietary computer management system licensed to several major insurance companies.
Premit uses voluntary employee beneficiary associations and TOLI to provide tax-advantaged funding of retiree health obligations.
The earnings gains from the life insurance contracts can accumulate inside cash buildups on a tax-exempt basis in a VEBA because they are not subject to federal unrelated business income taxes or alternative minimum taxes. The cash buildup is used to pay for retiree' health care costs.
"Our program doesn't rely on policy loans or the use of loan interest as a tax deduction," said Mr. Van Remortal.
John Hickey, principal at Kwasha Lipton, Fort Lee, N.J., said the issue of borrowing against the policy is not serious for TOLI since the trust is already tax exempt and the emphasis is on inside cash buildup to fund benefits, rather than on tax deductions.
He said the use of TOLI hasn't caught on as a funding vehicle for retiree medical liabilities, except among public utilities.