What's good enough for the Internal Revenue Service is good enough for New York State, or so it seems from the content of a late December internal memorandum by the New York State Insurance Department's (NYID) now-departed Superintendent Edward Muhl regarding the treat- ment of agent conference expenses now that Regulation 93 has been repealed.
Regulation 93, instituted in 1981 to clarify and expand sections of the New York State Insurance Code that limited company expenditures, spelled out (among other things) the circumstances under which companies could hold sales conferences and what conference expenses the companies could pay for-without considering that money income to the agents.
Since the early December repeal, many insurance executives have been left wondering how New York State auditors-who determine whether or not an insurance company is in compliance with New York State agent compensation limits-will now treat conference costs. The memo is the first step toward sorting this out.
According to the internal memo, the part of the cost of conferences that "meet the Internal Revenue Code's standard for ordinary and necessary business expenses and (a) are not includable in the recipient's gross income . . . and (b) represent reasonable allowances for agents' incidental ordinary and necessary business expenses associated with the conference such as meals, local transportation, and similar items" will not be considered compensation to the agent. The memo goes on to say that expenses for business meetings outside the U.S. that meet IRS standards for U.S. meetings also will not be considered compensation.
To some insurance executives, the memo doesn't go far enough. "Regulation 93 should not have been repealed without something official replacing it," says Armand de Palo, senior vice president and chief actuary for The Guardian Life Insurance Company of America in New York, NY and chair of the Life Insurance Council of New York's Core Committee reviewing Section 4228 of the New York Insurance Code. (Section 4228 sets standards for agent compensation but, without Regulation 93, no longer says how sales conference costs will be treated.)
"A lot of companies are very uncomfortable," de Palo says. "From a strict interpretation of the law, there's still nothing in the New York Insurance Code that explicitly allows companies to have a sales convention and not make it income to the agents." De Palo, who helped to draft the NYID's memorandum, is well aware of its limitations. "A memorandum has no force of law. It's not part of the code. It's only how the department feels today," he says.
What Will Change? How much will meetings change for New York licensed companies? Not at all for "pure" incentive travel programs, which Regulation 93 did not control: As always, if the trip is given as a reward and no business is involved, the total cost of the reward must be reported as income to the recipient, who pays taxes on its fair market value. (The restriction that still applies in this case is Regulation 49, which sets a cap on agent income.)
If, however, a New York insurance company wants to hold a convention that is deductible as a business expense (and not charged to an agent as compensation), the rules have changed somewhat. With Regulation 93 gone, there are no longer rules about how long a convention can last or restrictions on overseas travel. The cost of the convention is no longer limited to ten percent of qualifiers' first-year commissions, and anyone from the home office may attend as long as there is a business reason for being there.
Convention planners are not off the hook completely, however. Like Regulation 93, IRS rules do not allow deductions for meetings on cruise ships (except under very limited circumstances) and do not allow the company to pay for spouse or guest travel (unless he or she is a bona fide employee of the company claiming the deduction) without issuing a 1099. To judge whether a meeting is an "ordinary and necessary" business expense, IRS auditors require documentation of the amount of time spent on business, the venue, and who attended-although precise guidelines are not spelled out.
In addition, New York's $50 limit on gifts and awards is still in place. It was never part of Regulation 93, and remains as a NYID rule. De Palo, who is currently researching IRS limits on gifts, says the NYID may be willing to raise that figure in the near future to make it comparable to IRS limits, if they are higher.
And this is unlikely to be the last companies hear from the NYID. "The Department has been clear," de Palo says. "These IRS rules are minimum standards. There's nothing that says the Department won't come out with further guidelines."