Understanding Open Enrollment Period
July 19, 2015
Obama Health Care Reform
July 19, 2015

How Obama’s Budget Impacts You Financially

An Overview of the Obama budget’s tax proposals impacting life insurance and annuity products, life insurance companies, agents and financial advisors as business people and NAIFA members’ clients:

Expanded Application of Employer Owned Life Insurance (COLI) Pro Rata

Interest Deduction Limitations—As it proposed last year, the Administration

proposes a significantly adverse modification to rules that reduce the

deduction for interest paid on general borrowing when a company also owns

permanent life insurance. The proposal would eliminate an exception from the

rules that result in a smaller interest deduction when the business owned life

insurance (frequently referred to as COLI) is on the lives of officers, directors

and employees (unless they are 20 percent or greater owners). The pro rata

interest disallowance rule requires a COLI owner to reduce its deduction for

interest paid on general debt in an amount calculated by taking into account

cash values in life insurance policies on the company’s owners, officers,

directors and employees. This proposal would except only COLI owned on

the lives of 20 percent (or greater) owners.

Limitation on Dividends Received Deduction (DRD) — A reprise of a

proposal from last year, the DRD deduction would be modified with respect to

a life insurance company’s separate accounts. The proposal would undercut

longstanding rules regarding life insurers’ DRD that is designed to prevent

double taxation of corporate earnings. The administration’s proposal would

reduce the DRD that life insurers use in accounts that fund variable life

insurance and variable annuity contracts. The proposal would require a

separate account DRD to be calculated by using an earnings rate equal to a

gross earnings rate (net investment income of the account, divided by the

mean of the account’s assets), minus a company-retained percentage (amounts

retained by the company from the account’s net investment income, if any,

divided by the mean of reserves). Thus, under the proposal, the company’s

share with regard to a separate account would approximate the ratio of the

mean of the surplus attributable to the account to the mean of the account’s

assets. The proposal would be effective for taxable years beginning after

December 31, 2010.

Partial Annuitization Tax Rules—The proposal would allow taxation of

partially annuitized payments from an annuity under annuity rules (ratable

taxation), rather than the income-first tax rules applicable to lump sum

withdrawals from an annuity. The proposal seeks to tax partial annuitization

of nonqualified annuity contracts in the same manner as complete

annuitization of the contract.

Transfer for Value Rules—The budget proposes increased information

reporting on the sale of life insurance policies. It would also modify the

transfer for value rule exceptions to prevent policy buyers from avoiding tax

on death benefits. This proposal is aimed at life settlement transactions.

Information Reporting on Insurance Company Private Separate

Accounts—The budget proposal would require information reporting with

regard to each life insurance or annuity contract held in a life insurance

company separate account when that policy constitutes at least 10 percent of

the value in the separate account.

Independent Contractor Rule Changes—the proposal would allow the IRS to

issue guidance on the common law control test that determines what

constitutes an independent contractor; and to reclassify misclassified workers,

on a prospective basis

Health Reform: The budget includes systemic health reform, based on the

principles (and scoring) contained in the House (H.R.3962) and Senate

(H.R.3590) passed bills, as of December, 2009, with “overlap” between the

two bills removed.

Tax Hikes for High Income Americans

o Tax Brackets—The budget suggests expanding the 28 percent tax bracket

to $200,000 for individuals and $250,000 for married couples filing

jointly. Then, it recommends allowing the tax law to revert to its pre-2001

level, which would include two top rates of 35 percent and 39.6 percent.

This would be a significant tax increase for those with adjusted gross

incomes over $200,000/individual or $250,000/married filing jointly

o PEP—The budget proposes allowing reinstatement of the phase-out of the

personal exemption for taxpayers with adjusted gross incomes in excess of

$200,000 (individual)/$250,000 (married filing jointly)

o Pease—The budget proposes allowing reinstatement of the “Pease” rule

(named for the Congressman who devised it) that limits the value of

deductions to no more than 28 percent

Capital Gains

o General Rate—the proposal suggests allowing the capital gains tax rate to

revert to 20 percent for taxpayers with adjusted gross income in excess of

$200,000 (individual) or $250,000 (married filing jointly)

o Small Business—the proposal would allow small businesses to exclude

all the gain they realize on the sale of their stock, effective for qualified

small business stock issued after February 17, 2009. The stock would have

to be held for at least five years; the amount of gain eligible for the

exclusion is limited to the greater of $10 million or 10 times the

company’s basis in the stock. And the rule is limited to investments by

individuals (investments of a corporation would not qualify.)

Auto IRAs—The budget includes a proposal that would require all companies

with more than 10 employees who have been in business for at least two years

and who do not offer a qualified pension plan to enroll their workers in an

automatic IRA program.

Under the program, employers would automatically forward a portion of the

worker’s pay to an IRA. The program would become effective in taxable

years beginning after December 31, 2011. Employees who do not provide a

written participation election would be enrolled in a Roth IRA, at a rate of

three percent of compensation. By completing a written participation election,

all workers could opt out completely, choose a traditional rather than a Roth

IRA, and adjust their contribution levels (subject to IRA contribution limits).

Employers who must or who choose to offer the automatic IRA program

would et a temporary business tax credit of $25 per participating employee, up

to a maximum of $250/year for two years, to defray the cost of setting up the

program. Auto IRA contributions would qualify for the Savers Credit.

Expanded Savers Credit—The budget proposal would simplify the existing

savers credit under which qualifying taxpayers receive government matching

payments for certain contributions to retirement savings plans. Proposed is a

refundable tax credit equal to a 50 percent match on contributions to qualified

retirement savings of up to $500 per individual ($1000 per married couple). In

other words, if a qualifying taxpayer (one who earns less than a specified

amount) contributes $1,000 to a 401(k) plan, the federal government would

then contribute $500 to the person’s same 401(k) plan.

The savers credit begins to phase out for taxpayers whose adjusted gross

income (AGI) is $32,500 (individual) or $65,000 (married filing jointly). It

would be fully phased out at $85,000 (married filing jointly). These AGI

levels would be indexed for inflation, starting in 2012.

Increased Tax Credit for Establishing a Pension Plan—Small employers

(those with fewer than 101 employees) would get an expanded tax credit for

establishing a new qualified pension plan. The tax credit would be equal to 50

percent of the employer’s expenses in establishing/administering the plan, up

to a maximum of $1000 (twice the current law maximum of $500). A

qualifying business could take the tax credit for three years. This proposal

would take effect for taxable years beginning after December 31, 2011.

Small Business Expensing—The Adminsitratoin budget proposes extending

the small business expensing rules so that a business could deduct in the year

of acquisition the entire cost of business investments, up to a maximum of

$250,000 per piece of qualifying property and $800,000 overall. The

extension would make this expensing rule available for an additional year,

through tax years beginning in 2010.

Extension of Federal Subsidies for COBRA Premiums—The budget

recommends extending the federal subsidy for COBRA continuation health

insurance premiums to people who are involuntarily terminated prior to

January 1, 2011

Information Reporting on Insurance Company Private Separate

Accounts—The budget proposal would require information reporting with

regard to each life insurance or annuity contract held in a life insurance

company separate account when that policy constitutes at least 10 percent of

the value in the separate account.

Estate and Gift Tax Valuation Discounts—The budget proposes modification

of the rules used to value estates for transfer tax purposes as compared to the

economic value of the estate assets to the heirs.

New Hiring/Jobs Tax Credits—The Administration proposes tax credits for

companies that hire new workers, or increase the pay of existing workers

(those who are paid less than the Social Security wage base).

o Tax Credit for New Hires: President Obama is proposing a $5000 per

worker tax credit for companies that hire new workers.

o Payroll Tax Refund: Also offered by President Obama is a proposal to

refund a portion of an employer’s payroll tax liability when the employer

increases workers’ wages. Under the proposal, businesses would get a 6.2

percent tax credit on increases in aggregate wages that exceed the rate of

inflation. Because the tax credit would be calculated against the Social

Security payroll tax rate, the credit would not apply to wage increases paid

to workers who earn more than the Social Security wage base (currently

$106,800).

TRIA—The budget proposes revising the Terrorism Risk Insurance Act

program by increasing deductibles and co-payments, and increasing the

minimum qualifying size of a terrorist attack covered under the program. Also

proposed would be elimination of coverage for acts of domestic violence. The

proposal also would change the repayment requirements so that insurers

would have to repay 100 percent, rather than 133 percent, of federal payments

made under TRIA. As under current law, the proposal contemplates that TRIA

coverage would end as of December 31, 2014.

Codification of the Economic Substance Doctrine—The proposal would

require that any transaction have both objective economic substance and a

substantial nontax business purpose in order to meet the requirements of the

economic substance doctrine. That doctrine is used to evaluate whether a

transaction is a tax shelter.

An Overview of the Obama budget’s tax proposals impacting life insurance and annuity products, life insurance companies, agents and financial advisors as business people and NAIFA members’ clients:

Expanded Application of Employer Owned Life Insurance (COLI) Pro Rata

Interest Deduction Limitations—As it proposed last year, the Administration

proposes a significantly adverse modification to rules that reduce the

deduction for interest paid on general borrowing when a company also owns

permanent life insurance. The proposal would eliminate an exception from the

rules that result in a smaller interest deduction when the business owned life

insurance (frequently referred to as COLI) is on the lives of officers, directors

and employees (unless they are 20 percent or greater owners). The pro rata

interest disallowance rule requires a COLI owner to reduce its deduction for

interest paid on general debt in an amount calculated by taking into account

cash values in life insurance policies on the company’s owners, officers,

directors and employees. This proposal would except only COLI owned on

the lives of 20 percent (or greater) owners.

Limitation on Dividends Received Deduction (DRD) — A reprise of a

proposal from last year, the DRD deduction would be modified with respect to

a life insurance company’s separate accounts. The proposal would undercut

longstanding rules regarding life insurers’ DRD that is designed to prevent

double taxation of corporate earnings. The administration’s proposal would

reduce the DRD that life insurers use in accounts that fund variable life

insurance and variable annuity contracts. The proposal would require a

separate account DRD to be calculated by using an earnings rate equal to a

gross earnings rate (net investment income of the account, divided by the

mean of the account’s assets), minus a company-retained percentage (amounts

retained by the company from the account’s net investment income, if any,

divided by the mean of reserves). Thus, under the proposal, the company’s

share with regard to a separate account would approximate the ratio of the

mean of the surplus attributable to the account to the mean of the account’s

assets. The proposal would be effective for taxable years beginning after

December 31, 2010.

Partial Annuitization Tax Rules—The proposal would allow taxation of

partially annuitized payments from an annuity under annuity rules (ratable

taxation), rather than the income-first tax rules applicable to lump sum

withdrawals from an annuity. The proposal seeks to tax partial annuitization

of nonqualified annuity contracts in the same manner as complete

annuitization of the contract.

Transfer for Value Rules—The budget proposes increased information

reporting on the sale of life insurance policies. It would also modify the

transfer for value rule exceptions to prevent policy buyers from avoiding tax

on death benefits. This proposal is aimed at life settlement transactions.

Information Reporting on Insurance Company Private Separate

Accounts—The budget proposal would require information reporting with

regard to each life insurance or annuity contract held in a life insurance

company separate account when that policy constitutes at least 10 percent of

the value in the separate account.

Independent Contractor Rule Changes—the proposal would allow the IRS to

issue guidance on the common law control test that determines what

constitutes an independent contractor; and to reclassify misclassified workers,

on a prospective basis

Health Reform: The budget includes systemic health reform, based on the

principles (and scoring) contained in the House (H.R.3962) and Senate

(H.R.3590) passed bills, as of December, 2009, with “overlap” between the

two bills removed.

Tax Hikes for High Income Americans

o Tax Brackets—The budget suggests expanding the 28 percent tax bracket

to $200,000 for individuals and $250,000 for married couples filing

jointly. Then, it recommends allowing the tax law to revert to its pre-2001

level, which would include two top rates of 35 percent and 39.6 percent.

This would be a significant tax increase for those with adjusted gross

incomes over $200,000/individual or $250,000/married filing jointly

o PEP—The budget proposes allowing reinstatement of the phase-out of the

personal exemption for taxpayers with adjusted gross incomes in excess of

$200,000 (individual)/$250,000 (married filing jointly)

o Pease—The budget proposes allowing reinstatement of the “Pease” rule

(named for the Congressman who devised it) that limits the value of

deductions to no more than 28 percent

Capital Gains

o General Rate—the proposal suggests allowing the capital gains tax rate to

revert to 20 percent for taxpayers with adjusted gross income in excess of

$200,000 (individual) or $250,000 (married filing jointly)

o Small Business—the proposal would allow small businesses to exclude

all the gain they realize on the sale of their stock, effective for qualified

small business stock issued after February 17, 2009. The stock would have

to be held for at least five years; the amount of gain eligible for the

exclusion is limited to the greater of $10 million or 10 times the

company’s basis in the stock. And the rule is limited to investments by

individuals (investments of a corporation would not qualify.)

Auto IRAs—The budget includes a proposal that would require all companies

with more than 10 employees who have been in business for at least two years

and who do not offer a qualified pension plan to enroll their workers in an

automatic IRA program.

Under the program, employers would automatically forward a portion of the

worker’s pay to an IRA. The program would become effective in taxable

years beginning after December 31, 2011. Employees who do not provide a

written participation election would be enrolled in a Roth IRA, at a rate of

three percent of compensation. By completing a written participation election,

all workers could opt out completely, choose a traditional rather than a Roth

IRA, and adjust their contribution levels (subject to IRA contribution limits).

Employers who must or who choose to offer the automatic IRA program

would et a temporary business tax credit of $25 per participating employee, up

to a maximum of $250/year for two years, to defray the cost of setting up the

program. Auto IRA contributions would qualify for the Savers Credit.

Expanded Savers Credit—The budget proposal would simplify the existing

savers credit under which qualifying taxpayers receive government matching

payments for certain contributions to retirement savings plans. Proposed is a

refundable tax credit equal to a 50 percent match on contributions to qualified

retirement savings of up to $500 per individual ($1000 per married couple). In

other words, if a qualifying taxpayer (one who earns less than a specified

amount) contributes $1,000 to a 401(k) plan, the federal government would

then contribute $500 to the person’s same 401(k) plan.

The savers credit begins to phase out for taxpayers whose adjusted gross

income (AGI) is $32,500 (individual) or $65,000 (married filing jointly). It

would be fully phased out at $85,000 (married filing jointly). These AGI

levels would be indexed for inflation, starting in 2012.

Increased Tax Credit for Establishing a Pension Plan—Small employers

(those with fewer than 101 employees) would get an expanded tax credit for

establishing a new qualified pension plan. The tax credit would be equal to 50

percent of the employer’s expenses in establishing/administering the plan, up

to a maximum of $1000 (twice the current law maximum of $500). A

qualifying business could take the tax credit for three years. This proposal

would take effect for taxable years beginning after December 31, 2011.

Small Business Expensing—The Adminsitratoin budget proposes extending

the small business expensing rules so that a business could deduct in the year

of acquisition the entire cost of business investments, up to a maximum of

$250,000 per piece of qualifying property and $800,000 overall. The

extension would make this expensing rule available for an additional year,

through tax years beginning in 2010.

Extension of Federal Subsidies for COBRA Premiums—The budget

recommends extending the federal subsidy for COBRA continuation health

insurance premiums to people who are involuntarily terminated prior to

January 1, 2011

Information Reporting on Insurance Company Private Separate

Accounts—The budget proposal would require information reporting with

regard to each life insurance or annuity contract held in a life insurance

company separate account when that policy constitutes at least 10 percent of

the value in the separate account.

Estate and Gift Tax Valuation Discounts—The budget proposes modification

of the rules used to value estates for transfer tax purposes as compared to the

economic value of the estate assets to the heirs.

New Hiring/Jobs Tax Credits—The Administration proposes tax credits for

companies that hire new workers, or increase the pay of existing workers

(those who are paid less than the Social Security wage base).

o Tax Credit for New Hires: President Obama is proposing a $5000 per

worker tax credit for companies that hire new workers.

o Payroll Tax Refund: Also offered by President Obama is a proposal to

refund a portion of an employer’s payroll tax liability when the employer

increases workers’ wages. Under the proposal, businesses would get a 6.2

percent tax credit on increases in aggregate wages that exceed the rate of

inflation. Because the tax credit would be calculated against the Social

Security payroll tax rate, the credit would not apply to wage increases paid

to workers who earn more than the Social Security wage base (currently

$106,800).

TRIA—The budget proposes revising the Terrorism Risk Insurance Act

program by increasing deductibles and co-payments, and increasing the

minimum qualifying size of a terrorist attack covered under the program. Also

proposed would be elimination of coverage for acts of domestic violence. The

proposal also would change the repayment requirements so that insurers

would have to repay 100 percent, rather than 133 percent, of federal payments

made under TRIA. As under current law, the proposal contemplates that TRIA

coverage would end as of December 31, 2014.

Codification of the Economic Substance Doctrine—The proposal would

require that any transaction have both objective economic substance and a

substantial nontax business purpose in order to meet the requirements of the

economic substance doctrine. That doctrine is used to evaluate whether a

transaction is a tax shelter.

Brian Schroeder
Brian Schroeder
Brian J Schroeder – Independent Broker - (925) 513-7778