IRS may remove corporations' insurance benefit

July 07, 2002|By BLOOMBERG NEWS

WASHINGTON - The Internal Revenue Service plans to remove the tax benefit of a life insurance benefit used by corporations to pay their executives.

In new regulations proposed last week, the agency says executives must pay annual income tax on the cash accumulated in universal and whole life insurance policies when their company pays the premiums, saying the payments amount to an interest-free loan.

The IRS reversed a decision in February that suggested taxes were owed only on the cash value when a policy is terminated, tax and compensation experts say. An estimated 115,000 executives and employers will be affected by the rule, the agency said.

The IRS regulations deal with so-called split-dollar life insurance arrangements, or ownership and premium payment arrangements that involve some kind of cash-value life insurance such as whole, universal or variable universal life insurance.

The IRS became concerned about the arrangements in 1996 because investment accounts funded with corporate dollars were building up cash value tax-free for executives. The IRS regulations would for the first time differentiate between policies owned by employers and those owned by employees, and would not apply to existing policies.

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