Policyholder Surplus Accounts
(Section 815)
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The National Alliance of Life Companies (NALC) is a national
trade association of more than 250 life and health insurance companies which do
business in all 50 states and the District of Columbia. Smaller insurance
companies suffer under the current system of taxation; specifically, the
following tax provision.
Stock life insurance companies established policyholders
surplus accounts (PSAs) before the changes to the Tax Code in 1984. These
accounts were to be taxed only under two circumstances:
1) If the funds were distributed to shareholders; or
2) In the event that the company ceased being a life
insurance company.
In 1984, Congress changed the taxation of life insurance
companies to a method based on a comprehensive income calculation. At the same
time, Congress eliminated the ability of insurers to make any additions to PSAs. Congress also determined that the shareholder distribution
requirements in order to trigger taxation of PSAs would remain in place.
Any proposal to tax insurers retroactively by reaching back,
in some instances, as long as 40 years would be overly burdensome and unfair to
all insurers, but especially for smaller insurers. As stated above, Congress
addressed this issue in 1984. A review of the Committee Reports to the 1984
Tax Reform Act reveals that Committee recommended and Congress decided that
life insurance companies "will not be taxed on previously deferred amounts
unless they are treated as distributed to shareholders or subtracted from the
policyholders surplus account under rules comparable to those provided under the
1959 Act."
The burden on smaller insurers is greater because the funds
to pay the tax are not set aside. Any tax payments resulting from the imposition
of this new tax would come from the company’s surplus account. As we have
stated above, smaller insurers need their surplus to support growth. If they do
not grow, they cannot compete, resulting in a loss of jobs while the needs of
consumers may no longer be served. This additional burden would force smaller
insurers already strapped due to Federal taxation policy into an even deeper
hole.
Therefore, we urge the repeal of Section 815.
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