Has Wal-Mart gotten kinder and gentler? Has the multibillionaire Walton family suddenly decided to share its wealth by having Wal-Mart give employees something for nothing? Nope. Wal-Mart actually comes out millions of dollars ahead by buying this insurance, thanks to its clever use of a loophole in the federal tax code. The insurance program saved Wal-Mart about $36 million in income tax last year, and the company expects to save more than $80 million this year. And the real beauty is that this whole thing works . . . because Wal-Mart is the policy’s beneficiary. If you croak, Wal-Mart gets the money, even if you’re no longer working there.
Something sound screwy here? Welcome to the wonderful world of corporate-owned life insurance. This product, known as COLI, is almost unknown outside the worlds of insurance and tax avoidance. But users ranging from the comer hardware store to mighty Wal-Mart have helped COLI flower into a product that’s growing like a weed and currently costs the U.S. Treasury about $1.5 billion a year in tax revenues. That number has been rising rapidly as additional companies line up for their free money from Uncle Sam. According to Tax Notes, a specialized publication for tax mavens, big COLI users are virtually a subset of the Fortune 500. Among them: Winn-Dixie, with 33,000 policies; AT$T, 27,500; GTE, 22,000; Procter & Gamble, 14,000; Walt Disney and Eastman Kodak, 9,000 each, and Coca-Cola, 2,500. There are lots more, but you get the idea. A plan mostly designed to help small businesses raise a few bucks has become a raid on the Treasury by giant corporations.
Don’t confuse this insurance with the life insurance that many businesses offer as a fringe benefit. With regular corporate-provided life insurance, your family collects the money when you die. With corporate-owned life insurance, as I said, the company collects the money. Not a penny from the policy goes to your family. These mass policies are strictly a tax shelter for businesses. You can be covered by one of these policies and not even know it.
As you can see from the accompanying illustrations, a COLI shelter has lots of moving parts. The tax gimmick, simply, is this. A company buys whole life policies from an insurance company that lends it virtually the entire cost of the policy, and also lends it the interest payable on the loan. The interest is tax-deductible, which reduces the buyer’s taxes. When the employee dies, the company gets the insurance proceeds tax-free, and uses the money to pay off the loan. So the buyer gets years of deductions while shelling out little or no cash of its own. Even after the employee leaves, his or her now former employer typically keeps up the interest and premium payments. That’s because the longer the policy is in force, the more money the employer saves on taxes.
This is wonderful for the employers that use it and the insurance companies and consultants that peddle it. Unfortunately for them- and fortunately for the rest of us–the tax technicians at the House Ways and Means Committee have twigged to this game. Last month the committee proposed to phase out the interest deduction over five years. “Corporate-owned life insurance is giving free money to corporations,” Ways and Means chairman Bill Archer, Republican of Texas, told NEWSWEEK. “It’s utilized for no real business purpose other than to take advantage of a tax gimmick.”
Wal-Mart, by far the biggest player in this particular tax game, was clearly surprised by Archer’s bid to take away its free lunch. “We studied this hard and long before we put it in,” said Tom Emerick, who runs the department that designs Wal-Mart’s employee benefits. “We would never try to do anything that might be considered abusive,” he added. “We thought we were using COLI exactly how it was designed to be used.” Wal-Mart says it offers about $60,000 of corporate-owned life insurance to every employee who signs up for the company’s benefit program. Their survivors don’t get any of the policy’s proceeds, but Wal-Mart agrees to pay $5,000 to the family of anyone who dies while employed by Wal-Mart, $10,000 for an accidental death. Families of former employees get $1,000. This isn’t a fortune, but it’s free, which gives Wal-Mart employees a reason to sign up. Wal-Mart, of course, gets tax deductions that are worth much more than the death benefits it pays.
Wal-Mart began using corporate-owned insurance in 1993, when President Clinton’s proposed changes in the health-care system seemed likely to sharply increase the company’s insurance costs. When the changes died, according to Emerick, Wal-Mart used the tax savings to benefit employees-by sweetening its prescription-drug plan and by extending health coverage to some part-time employees. Emerick’s argument, standard for corporate-life-insurance users, is that the tax savings benefit workers, not the company. “Its sole use is to fund and expand employee benefit plans,” he said. Peter Cahall, chief executive of Newport Group, a Heathrow, Fla., company that designs and administers COLI plans, also claims that his clients use them to help pay for employee benefits. “This has been a longstanding policy,” he said, “and has been looked at by legislators on the state and local levels for almost 30 years.”
But whatever you call it, Wal-Mart and other COLI users are clearly getting a big freebie-paid for by us. Yes, Wal-Mart forked over more than $1.5 billion for income tax last year and will probably pay more this year. But does that justify giving the company a $120 million tax gift for those two years? Let Wal-Mart raise prices to pay for benefits, or accept lower profits. Ditto for Coca-Cola and Disney and Procter & Gamble and all the other companies that use this tax dodge. To them, it’s a targeted tax benefit; to the rest of us, it’s a loophole.
The elimination of this particular loophole is only a tiny part of the immensely controversial overall tax bill. Companies that benefit from this insurance argue that eliminating the interest deduction for existing corporate policies is unfair, because it changes the rules in the middle of the game. That isn’t particularly convincing. After all, Congress has tinkered with interest deductions for years, most notably when it phased out consumer interest deductions as part of the 1986 tax act. So let’s get real. The COLI-closing provision deserves to live, regardless of the fate of the rest of the House tax bill. You can’t blame Wal-Mart for using a perfectly legal tax gimmick. But it’s better for the rest of us to have the Wal-Marts of the world make money by moving more merchandise rather than by simply shuffling paper.
