Navigating regulatory changes: The impact on COLI and BOLI

09/19/2024 — Key points:

• Regulatory shifts are going to affect the COLI and BOLI markets.
• Noncompete agreements, which have historically safeguarded employer interests, are facing scrutiny.
• The Tax Cuts and Jobs Act of 2017 continues to influence businesses and impacts how they approach employee benefits and financial planning.
• The Basel III Endgame introduces critical changes to the U.S. risk-based capital framework, including regulatory capital requirements.

As the business landscape continuously changes, regulatory shifts can play an important role in shaping industries. One area that may be affected by recent regulatory activity is the institutional life insurance market, particularly corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI). Understanding the regulatory impacts of these lesser-known types of life insurance can help you as you work with your business clients. As we continue to follow these regulatory shifts, it’s becoming increasingly clear that companies will have to adapt and explore innovative solutions to optimize their financial strategies.

Noncompete agreements and their implications

Noncompete agreements are contracts in which employees agree not to compete with their employer during or after employment. These agreements typically restrict employees from working with competitors, starting similar businesses or engaging in any business activity that would conflict with the employer’s interests. Employers have historically used noncompetes to protect trade secrets, maintain a competitive edge and safeguard investments in employee development.

The Federal Trade Commission (FTC) ban on noncompete agreements was set to go into effect in September 2024, but movement on this issue continues. Recent action by the Biden administration has drawn criticism from the Republican Party, but Democratic control suggests further action on noncompetes at the state level in states such as Texas, Pennsylvania and Florida.

Impact on businesses:

A 2024 Nationwide Economic Impact survey reveals that over half of business owners (54% of small- business owners and 62% of middle-market business owners) cite preparing for economic disruption as a top challenge. Many businesses have faced employee demands for better compensation and benefits.

If the noncompete ban is upheld, employers may focus on creating a workplace environment that promotes long-term employment by offering comprehensive benefits packages, especially to key employees. COLI can be used to informally fund nonqualified deferred compensation (NQDC) plans, helping businesses attract and retain top talent, recognize employee contributions and provide greater potential for supplemental retirement income.

Potential impact of the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 aimed to stimulate economic growth by lowering marginal tax rates and reducing the cost of capital. Key changes included lowering the corporate tax rate from 35% to 21% and introducing preferential tax treatments for small businesses. Republican tax writers’ express intent to maintain corporate tax measures and continue lowering the corporate tax rate. Government officials need to identify ways to fund these $4 trillion in tax cuts and reduction to the treatment of NQDC plans has been considered as an option.

Impact on businesses:

Regardless of the 2024 election outcome, businesses may face challenges. Your business owner clients using COLI to informally fund NQDC plans face bipartisan risks. NQDC plans allow key employees to save and retire comfortably by deferring a portion of their compensation before taxes. As salary levels increase, the percentage of compensation that employees can defer into a qualified plan decreases. COLI provides an alternative for supplemental retirement savings.

Basel III Endgame

Basel III Endgame (B3E) represents a significant update to global capital standards, particularly affecting the U.S. banking industry. It introduces critical changes to the U.S. risk-based capital framework, including regulatory capital requirements, risk management and supervision for banks. The changes extend more granular, rigorous rules to both large U.S. banks and regional/midsize banks. U.S. regulators propose July 1, 2025, as the compliance date for banks to adapt and enhance operational efficiency.

Impact on businesses:

Driven by decision-makers in the current Treasury Department and other banking regulators, B3E has sparked differing opinions among Republicans and Democrats regarding coordination with Europe and non-U.S. actors.

• Opponents view B3E as arbitrarily punitive to the long-standing mutual insurance company business model
• Under B3E, banking regulators would assess financial strength using narrow GAAP accounting standards, potentially excluding important nuances of insurance accounting
• Mutual insurers may face limitations in offering products to banks due to B3E changes
• For financial professionals offering BOLI solutions, B3E would limit the number of carriers who offer products to banks by potentially eliminating mutual insurers from their consideration; mutual insurers are some of the largest providers of general account BOLI solutions, and many — including Nationwide® — have been in business for almost 100 years with a history of disciplined investing

With these regulatory changes on the horizon, companies must innovate, recalibrate and seek unique solutions to optimize their financial strategies. Your knowledge of regulatory impacts on the COLI/BOLI industry can set you up as an important resource for your business clients.