Impact of Final Regulations on Reportable Policy Sales for COLI/BOLI Policies

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Background

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) modified the prior-law exemptions of the Transfer for Value Rules (“TFV Rules”) to include new Reportable Policy Sale (“RPS”) requirements that apply to all transfers for valuable consideration. This rulemaking has important implications for the company-owned life insurance (“COLI”) and bank-owned life insurance (“BOLI”) policies and will affect the taxation of death benefits on some contracts.

Commentary

The final regulations are responsive to the concerns raised by the life insurance industry with respect to the potential impact of the RPS rules on ordinary course transactions, such as mergers and acquisitions. Foremost, the guidance in the final regulations may be applied retroactively to the TCJA’s enactment date (Dec. 2017), protecting clients from the unintended consequences of the unclear statutory rules enacted by the TCJA. In addition, the final rule includes nine (9) exceptions that preserve the prior-law tax treatment of the death benefits with respect to policies transferred in ordinary course transactions. Satisfaction of any one of the nine will preserve the prior law tax treatment.
The following table highlights the exceptions most likely applicable to the broadest number of taxpayers:
Analysis for C Corporations
Ordinary course stock transactions involving C Corporations are generally exempt from the reportable policy rule. The exception provides that there is no “indirect transfer” of life insurance where:
  • the acquirer becomes a beneficial owner of a C Corporation that owns life insurance contracts; and
  • life insurance contracts do not comprise more than 50 percent of the gross value of assets of such C Corporation immediately before the acquisition.
Analysis for S Corporations
  • Step 1 – Grandfather Provision. In instances where an acquiror purchases an entity through a stock transaction, each COLI/BOLI policy indirectly transferred to the acquiror through that purchase is not an RPS, so long as the entity held an interest in the life insurance policy prior to January 1, 2019.
  • Step 2 – Relationship Exceptions. If the acquired S Corporation (regardless of transaction form) has COLI/BOLI policies acquired after January 1, 2019, the insurance policies may still qualify for an exception if the insured has a substantial financial or business relationship with the acquiror (or acquiree).

Check the Remaining Exceptions. If the exceptions described above do not fit your circumstance, feel free to call us or consult the Final Regulations (link below) to determine whether one of the remaining exemptions applies.

Additional Detail:  Final Regulations

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Through a powerful combination of independence and experience, Mullin Barens Sanford Financial and Insurance Services (MBS Financial) is a leading consulting firm that assists companies with 409A and other executive benefit needs.

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