NAIFA Government Relations Team warns of threats to industry during annual meeting in Las Vegas
By National Underwriter
By Warren S. Hersch
Legislative and regulatory efforts that pose potentially serious threats to life insurance professionals, including Congressional action to address end-of-year deadlines and tax reforms that could circumscribe or eliminate the tax-favored treatment of life insurance, were front-and-center during a Legislative Forum held Monday during the second day of the National Association of Insurance And Financial Advisors (NAIFA). The gathering brought together NAIFA's Government Relations Team, which provided updates on developments in Washington D.C. and in statehouses nationwide during the advocacy briefing.
Danea Kehoe, an outside counsel with DBK Consulting, spoke of the impending "fiscal cliff:" the consequences of Congress failing to act by year-end on an estimated $7 to $10 trillion in federal spending and tax rules. Topping the list: the expiration on December 31 of the Bush tax cuts implemented in 2001 and extended in 2003.
Absent Congressional action, a reversion to the pre-2001 tax regime, combined with necessary fixes to the alternative minimum tax and tax extenders, will amount, said Kehoe, to a $4 trillion tax increase. Add to this figure other considerations that come with an end-of-year deadline.
Among them: $1.2 trillion in automatic spending cuts that are due to take effect on January 1; Congressional action on whether to extend federal, supplemental unemployment benefits and the current two-point cut in employees' share of Social Security taxes; and an almost 30% cut in the rate by which Medicare reimburses doctors.
Kehoe flagged still other looming deadlines, including one in 2013 respecting the federal government's debt ceiling limit, which will have to be raised to cover expenditures and interest on the national debt; and, within the next three weeks, a bill to prevent a government shut-down.
"It appears likely that Congress will pass a six-month spending bill in the next week or two, but there are no guarantees," said Kehoe.
Observing a consensus among a economists, she added that a return to the pre-2001 tax rules, while reducing the federal budget deficit by about $7 trillion, would be too precipitous, sending the weak U.S. economy into recession or, potentially a "full-blown depression."
For life insurance professionals and their clients, reimplementation of the old tax rules would be as significant. The top income tax rate and tax on dividends would return to 39.6%. And capital gains tax would rise to 20%
"A higher tax rate on income could make the inside build-up of life insurance and annuities look more attractive," said Kehoe. "But the higher estate tax rate and capital gains rate on mutual funds and other financial investment options are negatives."
High on the list the list of concerns for NAIFA and the life insurance industry is House bill H.R. 6169, which mandates a tax reform plan by April 30, 2013.
Diane Boyle, vice president of Federal Government Relations for NAIFA, said that revenue-enhancing measures, such as the closing of tax loopholes and the elimination of "tax expenditures," including potentially the tax-deferred treatment of cash value life insurance, will likely be among proposals contained in the plan. One reason: the need to close the burgeoning budget deficit and national debt, the latter of which now stands at $16 trillion--more than the U.S.' current gross domestic product.
Republicans and Democrats, said Boyle, agree that tax reform must engender lower tax rates and a broadening of the tax base, but they disagree on the means by which these goals are attained. Republicans demand that taxes not be raised, whereas many Democrats don't want to see cuts to entitlement programs. To achieve consensus, said Boyle, the House and Senate might coalesce around proposals that, rather than eliminating the tax-favored treatment of the inside build-up life insurance, limit the scope of the tax benefit. One possibility: eliminating tax-deferral for individuals whose income is above a certain level or who intend to use their policies for particular advanced planning applications.
"These proposals present challenges to our industry," said Boyle. "We in the industry need to be able to communicate our concerns about them to Congress."
"You [NAIFA attendees] have to participate in this effort to preserve the 100 years of tax-favored treatment of life insurance," she added. "And April will be the time to do it, when a Congressional conference will be taking place."
Turning to health care reform, Boyle noted that that NAIFA is seeking modifications to the 2010 Patient Protection and Affordable Care Act, which resulted in 21 additional taxes totaling $1 trillion in revenue. The advocacy efforts have to date yielded one positive development: H.R. 1206, NAIFA-backed legislation designed to address the negative consequences of PPACA's medical loss ratio (MLR) provision. The bill, she said, is expected to pass the House, laying the foundation for enactment next year.
Also a success for NAIFA during the year were lobbying efforts to defeat an amendment introduced in the House by Rep. Paul Gosar (Rep.-AZ) that would have repealed the McCarran-Ferguson Act's federal anti-trust exemption for the "business of health insurance." Had the amendment passed, life insurance and annuities would have been subject to a federal anti-trust regulator, in addition to the current state regulators.
"McCarran-Ferguson is the cornerstone of state regulation, dating from the mid-1940s and upholds a principal that goes back to the start of insurance regulation," said Scott Sinder, an outside counsel for NAIFA at Steptoe & Johnson LLP. "The last thing insurers need is an anti-trust regulator on top of the state regulators questioning their judgments. So [defeat of the amendment] is a very important development for us."
Turning to agent licensing reform, Sinder said that NAIFA and other industry organizations are championing NARAB II: The National Association of Registered Agents and Brokers Act (H.R. 1112). Among other provisions, the House bill would create a central board through which agents are licensed and subject NARAB members to one set of non-resident licensing and CE requirements.
The bill, said Sinder, enjoys strong bipartisan backing in Congress.
"Being admitted as a NARAB member would automatically entitle you, as an agent, to be federally licensed in any other state," said Sinder. "We expect that the House will pass H.R. 1112 this month and that [the Federal Insurance Office] will address NARAB in a forthcoming report this month.
Jill Hoffman, NAIFA's assistant vice president of federal government relations, said that NAIFA also is backing an industry push to make FINRA the self-regulatory organization (SRO) for investment advisors. Echoing testimony by NAIFA Past President Tom Currey before Congress on June 6, Hoffman noted that NAIFA prefers this option to the alternatives: (1) requiring investment advisors to pay the SEC a user fee to fund their exams or; (2) establishing a new SRO for investment advisors.
"We believe that making FINRA the SRO is the best solution of all the options available," said Hoffman. "Because it will mean that you are subject to one master, and not multiple organizations examining you on an individual basis."
Originally published on LifeHealthPro.com