IRS Has Not Collected Information on the Policies, but Federal Revenue Estimators Have Estimated the Forgone Tax Revenues

IRS officials told us that the agency has not generally required businesses  to report on the value of, earnings on, or death benefit income from  business-owned life insurance policies. Of these, 11 provided information on the intended use of their  business-owned life insurance policies. The insurance regulators of the four states  we contacted described limited oversight of business-owned life insurance  sales, and the four state regulators and NAIC generally did not have  concerns about the policies. Federal Bank Regulators Examined Some Institutions’ Purchases of Business-Owned Life Insurance and Have Not Had Major Supervisory Concerns

Federal bank regulators have issued guidelines for purchases of business- owned life insurance that they have used in overseeing banks and thrifts’  holdings of such policies. SEC officials said that, to date, no such  problems have arisen, and the agency has not had investor-protection  concerns about public companies holding business-owned life insurance. The  insurance department officials told us that they conduct limited oversight  to test compliance with their states’ insurable interest and consent laws. More Comprehensive Data Could Be Useful to Congress; Costs Would Be Incurred in Obtaining the Data

More comprehensive data on the prevalence and use of business-owned life  insurance could be useful to Congress in assessing the potential effects of  legislative proposals that address the tax-favored treatment of this  insurance. Data would be most useful if reported separately for business  continuation and broad-based policies because legislative proposals that  would further limit the tax-favored treatment of business-owned life  insurance generally have treated the policies differently—they have applied  primarily to broad-based policies. Useful data that are not available include the  amount of tax-free income received from the death benefit payments on  business continuation and broad-based policies—data that could help  Congress better understand the potential effect of changes to the tax  treatment of these policies on tax revenues. Should  Congress conclude that such data would facilitate its ongoing deliberations  on the appropriate tax treatment of business-owned life insurance,  decisions would be required on what data are needed, who should provide  the data (insurance buyers or sellers), who should collect the data (SEC,  Treasury, NAIC, or another organization), how to collect the data  (additional reporting or a survey), what it would cost to collect the data,  and whether the benefits of collecting additional data warrant the cost of  doing so. Matter for Congressional Consideration

If Congress decides that it needs more comprehensive data on the  prevalence and use of business-owned life insurance, such as the tax-free  income from death benefit payments and/or other select data reported  separately for business continuation and broad-based policies, Congress  could, among other alternatives, obtain the data by  assigning responsibility to SEC or Treasury to (1) require purchasers of  business-owned life insurance or insurers to report the data in their  financial statements or federal tax returns, respectively, or (2) conduct a  survey of the purchasers or insurers to obtain the data; or   encouraging NAIC to (1) require insurers to report the data in the annual  reports they file with NAIC or (2) conduct a survey of insurers to obtain  the data. In addition, we  reviewed the Joint Committee on Taxation’s and the Office of Management  and Budget’s reported estimates of forgone tax revenues attributable to  business-owned life insurance and obtained information from officials of  both entities about the development of these estimates. We also discussed these  topics with officials at SEC and IRS and reviewed their regulations,  reporting requirements, and applicable sections of the Internal Revenue  Code. Ms. Davi M. D’Agostino  Director, Financial Markets and Community Investment  fund employee benefits and some state laws require that the policies be segregated into a trust for  that  purpose.
Why GAO Did This Study

Business-owned life insurance is permanent insurance held by employers on the lives of their employees, and the employer is the beneficiary of these policies. Its attractive features, common to all permanent life insurance, generally include both tax-deferred accumulation of earnings on the policies' cash value and tax-free receipt of the death benefit. Legislators have expressed concerns about the ability of employers to receive tax-favored treatment from insuring their employees' lives. GAO was asked to discuss (1) the prevalence and use of business-owned life insurance, (2) federal and state regulation and oversight of these policies, and (3) the potential usefulness of and costs associated with obtaining more comprehensive data on business-owned life insurance.

What GAO Found

Limited data are available on the prevalence and use of business-owned life insurance. Federal bank regulators have financial reporting requirements, but not all institutions holding policies meet reporting thresholds. The Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and state insurance regulators told GAO that they generally have not collected comprehensive policy data because they have not had a need for such data in fulfilling their regulatory missions. GAO found, however, that some insurers have disclosed information about policy sales. Also, the Joint Committee on Taxation and the Office of Management and Budget have reported estimates of forgone tax revenues from these policies as $7.3 billion to $13 billion for the period 2004-2008, excluding forgone tax revenues on additional income from death benefit payments. Regulators said that they do not generally collect data on the intended use of policies, but that businesses can, for example, use business continuation policies to insure against the loss of a key employee or broad-based policies to fund employee benefits. The federal bank regulators told GAO that they have reviewed the holdings of institutions with significant amounts of business-owned life insurance against their guidelines and concluded that no major supervisory concerns exist. SEC officials said that the agency has relied on its broadly applicable requirement that public companies disclose information material to investors in their financial statements, which would include any material information related to business-owned life insurance; SEC did not have investor protection concerns about public firms' ownership of the insurance. IRS had some requirements related to the tax treatment of the insurance and is reviewing compliance with these requirements. State laws governing the insurance differed; the four states' regulators that GAO contacted described limited oversight of the policies, and these regulators and the National Association of Insurance Commissioners (NAIC) generally reported no problems with the policies. More comprehensive data could be useful to Congress in assessing the potential effects of legislative proposals that address the tax-favored treatment of business-owned life insurance. Costs would be incurred in obtaining the data. Such data would be most useful if reported separately for business continuation and broad-based policies because legislative proposals have generally treated these policies differently. Data on the amount of tax-free income that businesses received from death benefits could help explain the potential effect of changes to the tax treatment of policies on tax revenues. Businesses holding the policies or insurance companies that sold them could provide this and other data. SEC, Department of the Treasury (Treasury), and NAIC already collect financial information from businesses and insurers and could be required or asked to collect the data. Should Congress decide that the data would be useful, decisions would be required on, among other things, whether the benefits of collecting the data outweigh the costs of doing so.