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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Tft Mr. Eccles Date M»y ?, 1951 Subject: Mr* Carpenter In Accordance with the diceussion at a meeting of the Board last week, there i» attached for your perusal the report of the Towers fins on the revision of the active service death benefit provided under the Federal Haserv© Retirement System. Attachment THE FEDERAL RESERVE BANKS REPORT ON REVISION OF ACTIVE SERVICE DEATH BENEFIT PLAN May 2, 1951 TOWERS, PERRIN, FORSTER & CROSBY, INC. 12 SOUTH 12TH STREET PHILADELPHIA? g3O PARK AVENUE NEW YORK 17 38 S. DEARBORN STREET CHICAGO 3 May 2, 1951 THE FEDERAL RESERVE BANKS REPORT ON REVISION OF ACTIVE SERVICE DEATH BENEFIT PLAN TABLE OF CONTENTS SECTION A: Improved Benefit Schedule: Advantages Of Group Life Insurance • • • • * » • « • , • * • • » • • » 1 SECTION B: Insurance Company Quotations • 5 SECTION C: Mechanics Of Making Insurance Effective. . • • • • 7 TABLE 1: Summary Of Insurance Company Replies To Questionnaire TABLE 2: Letter From Lee, Toomey & Kent To Mr. J. H* Shreiner Re Retirement System Of The Federal Reserve Banks EXHIBIT A: Memorandum For Insurance Companies Concerning Proposed Group Life Insurance Plan For Employees Of The Federal Reserve Banks And Federal Reserve Board EXHIBIT B: Essential Details Concerning Proposed Group Life Insurance Plan For Employees Of The Federal Reserve Banks And The Federal Reserve Board EXHIBIT B-l: The Federal Reserve Banks EXHIBIT C: Questions For Insurance Companies As To Underwriting Of Proposed Group Life Insurance Plan For Employees Of The * federal Reserve Banks And The Federal Reserve Board T O W E R S , PERRIN, FORSTER SL C R O S B Y , INC. May 2, 1951 THE FEDERAL RESERVE BANKS REPORT ON REVISICM OF ACTIVE SERVICE DEATH BENEFIT PLAN It Following our preliminary discussions with you on various features of your existing Active Service Death Benefit Plan, and after careful study of the benefits provided by this Plan, we are submitting this report in order to present an improved schedule of benefits and to explain the advantages of underwriting the death benefits by means of a group life insurance contract, This report also includes summaries of quotations submitted by seven insurance companies as well as a discussion of the mechanics of making the insurance effective• SECTION A: IMPROVED BQIEFIT SCHEDULE: ADVANTAGES OF GROUP LIFE INSURANCE DEATH BENEFITS RELATED TO PAY VERSUS DEATH BENEFITS RELATED TO SERVICE 2. The present Active Service Death Benefit Plan provides an amount equal to the salary of an employee during the last 12 months of credited service with the employing bank, 3. It had been proposed that the Active Service Death Benefit Plan be amended to provide for a benefit of one year's pay during the first 16 years of an employee's service and to increase this death benefit by $% during each of the succeeding 20 years so that upon the attainment of 37 years of service and thereafter the death benefit is equal to two years1 pay* 4. In our judgment, the death benefits should be related to pay with little or no relation to service* Briefly, our reasons are as follows: (a) Needs are generally related to present earnings and standard of living, not to service, (b) Relating death benefits to pay imposes no penalty on persons hired at more mature ages as does a plan with a service feature, (c) Relating benefits to pay is the modern practice; most plans which related death benefits to service have been changed to eliminate this feature, (d) Relating death benefits to pay is easily understood by employees, (e) A plan related to pay may be fitted more readily into an employee's personal insurance program than a plan geared to service. T O W E R S , PERRIN, FORSTER &L C R O S B Y , INC. The Federal Reserve Banks - 2- May 2, 1951 PRACTICES OF OTHER LARGE EMPLOYERS 5* Studies of the development of modern death benefit plans of progressive employers show two'different trends/"" First, benefits based on service have been generally abandoned in favor of benefits based on pay* Second, plans providing higher death benefits, such as 2 years1 pay, are becoming increasingly more common. 6, For many companies, group life insurance provides only a part of the total death benefits payable* Frequently, companies provide substantial death benefits, in addition to group life insurance, under their pension plans, widows1 benefit plans, accidental death benefit plans, and the like; therefore, it is necessary to look at the aggregate benefit in reviewing the practices of other employers* Specific illustrations of the practices of a number of leading companies are outlined below: (a) Standard Oil of California - In 1918 inaugurated death benefit plan providing one year's pay after 10 years of service• On 1-1-49 an additional yearfs pay was added without service requirement* (b) Standard Oil of New Jersey - Death benefit of two or more years1 pay* (c) Standard Oil of Ohio - Over two years1 pay for most employees (the #5,000 employee would receive $13,250 of death benefit)* (d) Sun Oil Company - One and one-half to two years1 pay for most employees (the #5,000 employee would receive #20,000 of death benefit)* (e) Pure Oil Company - One and one-half to two years1 pay* (f) Pennsylvania Company - One and one-half to more than two years1 pay* (g) Chase National Bank - Two years1 pay* (h) Central Hanover Bank - Two years1 pay after 3 years of service* (i) First National Bank of Chicago - Death benefits average more than two years1 pay and under some circumstances may exceed five times pay* (j) National City Bank of New York - Two years' pay $fter 6 years of service* (k) National Shawmut Bank - Two years1 pay. (1) First National of Philadelphia - Two years1 pay* (m) Eastman Kodak Company - Two years1 pay* (n) Union Carbide & Carbon Company - Graduated by earnings of over one year's pay to two years1 pay. (Earnings of more than #5>000 carry death benefit of two years1 pay*) (o) Spool Cotton Company - Approximately two years1 pay for salaried employees^ TOWERS, PERRIN, FORSTER & CROSBY, INC. The Federal Reserve Banks - 3 - May 2, 1951 (p) National Lead Company - Two years1 pay, (q) Wilson & Company - Two years1 pay after 5 years1 service for salaried emplqyees . (r) Washington Gas Light Company - Two years1 pay* (s) Rochester Gas & Electric Corp. - Two years1 pay after 3 years1 service. 7« While benefits in many cases are subject to maximum limits, it is significant that insurance plans provide maximum benefits of $40,000 or more at the following companies: Eastman Kodak, Union Carbide, National City Bank of New York, Pennsylvania Company, Sinclair Oil, Standard Oil of Indiana, Proximity Manufacturing Company, Standard Oil of California, Reynolds Metals, Thompson Products, Home Insurance Company, Richfield Oil, Standard Brands, Marshall Field, Stewart Warner, Revere Copper & Brass, Chase National Bank, Consolidated Edison, Manufacturers Trust Company of New York, General Motors, Republic Steel. 8. The trend in high calibre, progressive organizations is, first, to establish death benefits which generally do not increase with lengths of service. Secondly, to establish the amount of the death benefit at approximately two years! pay or higher. Finally, such companies have established relatively high maximum limits, frequently in excess of $50,000. TAX STATUS OF DEATH BENEFIT PAlfMENTS 9. Under the procedure currently employed by the Federal Reserve Banks or under any modification of this procedure which contemplates payment of the death benefit through means other than life insurance, such death benefit constitutes taxable income to the beneficiary. This has been established by rulings of the Federal Government; and has been confirmed by our Washington counsel and the counsel of the Board of Governors. Opinion of our Washington counsel appears as Table 2. 10. If benefits under the Active Service Death Benefit Plan were provided by means of life insurance there would be no Federal income tax payable by the beneficiary on the death benefit. In addition, if these death benefits were provided by group life insurance, the employees would not have to pay any tax on the premiums payable to the insurance company. This tax status has existed for more than 25 years. 11. In those states where individual income taxes are imposed, proceeds of life insurance contracts are exempt from such state income taxes. Also in many states life insurance proceeds when payable to a named beneficiary are exempt from state inheritance and estate taxes. While it is our understanding that these exemptions do not apply to death benefits other than life insurance, this should be determined by your counsel. ADDITIONAL FEATURES AVAILABLE UNDER GROUP LIFE INSURANCE 12. Under group life insurance, several benefits are commonly provided which are not available under the present Active Service Death Benefit Plan. T O W E R S , PERRIN, FORSTER & L C R O S B Y , INC* The Federal Reserve Banks - 4 - May 2, 1951 One of these is the conversion right which permits an employee who withdraws frcm service or who retires to continue his insurance protection by converting his insurance to an individual policy. No medical examination is required under this procedure; therefore the conversion right has special appeal to employees whose health is below normal• 13o A second benefit under group life insurance which is not available under your present Plan is the continuation of full insurance coverage in case of total and permanent disability* This continued insurance is provided without cost to the disabled former employee* 14o Finally,* in most states life insurance proceeds payable to certain b f i i i are exempt from claims of creditors of the insured. COST OF PROVIDING ADDITIONAL BENEFITS AND AVAILABILITY OF GftOUP INSURANCE 15• The costs of the present Plan and of the proposed modification of this Plan which increases the death benefits according to length of service have been estimated by Mr« George Buck* Assuming the continuance of the funding procedures employed by Mr* Buck, a flat benefit of two yearsf pay might require a payment of 3% of payroll to the fund in the forthcoming year. This figure would diminish in future years to a total of approximately double your current figure of l.XB% or 236& 16. Group life insurance of two years1 pay for employees of the Board of Governors and of the Federal Reserve Banks should, over a period of 10 or more year3, develop a cost of approximately 105$ to 114$ of the claims paid. This statement is based on quotations recently submitted by insurance companies (see Table l ) . 17# It is estimated that a group life insurance program of two years1 pay would require a first year premium of approximately 2*3$ of payroll. However, if the mortality experience in the next 10 years duplicates the Federal Reserve System experience in the past 5 years, the average annual net outlay for group lif insurance of two years1 pay may be as low as 3/4 of 1% of payroll. SUMMARY AND RECOMMENDATION 18, Modern death benefit plans relate benefits to earnings not to servicej and frequently provide benefits of two years1 earnings. Under your present Plan, income taxes on the benefits substantially reduce the value of these benefits. If the benefits are provided through group life insurance?, this tax exposure can be eliminated. 19* It is recommended that the present Plan benefits be increased to approximately two years1 pay without regard to service. It is further recommended that the plan benefits be provided through group life insurance. T O W E R S , PERRIN, FORSTER & C R O S B Y , INC. The Federal Reserve Banks - 5 - May 2, 1951 SECTION B: INSURANCE COMPANY QUOTATIONS 20* On January 26, 1951 we reviewed with your committee an insurance company questionnaire which we had prepared describing the provisions of a proposed group life insurance plan for your employees (Exhibits A, B, and C). On January 29th this questionnaire was sent to the following seven life insurance companies: Aetna Life Insurance Company Connecticut General Life Insurance Company Equitable Life Assurance Society of the U.S. John Hancock Mutual Life Insurance Company Metropolitan Life Insurance Company Prudential Insurance Company of America Travelers Insurance Company Hartford, Conn. Hartford, Conn• New York, N. Y. Boston, Mass* New York, N. Y. Newark, N. J. Hartford, Conn* 21. Answers were received from all of these insurance companies. Each indicated willingness to underwrite the proposed plan as outlined in the memorandum. The answers are summarized in Table 1. The following general observations are made concerning the answers to the questionnaire. 22. All of the provisions of the proposed plan were acceptable to all of the insurance companies. In our judgment the following suggestions made by several insurance companies deserve serious consideration: (a) Determine amount of benefit by means of a salary schedule rather than using exact salary. (b) Provide for a reduced amount of insurance for retired employees. 23• Each of the companies has said that its group contract will specify gross rates in accordance with the new rates promulgated by the New York Insurance Department, effective July 1, 1950. Both the Equitable and the Aetna are willing to specify lower rates at the outset if the new contract is combined with one of their existing contracts now in force at one of the banks• 24» The gross rates charged determine the initial premium outlay, but have comparatively little effect upon the real cost of the plan. After the first year, costs of a case such as this are determined preponderantly by the mortality experience of your group, to which is added the insurance company's "retention". A reduced gross rate will have but small effect upon the real costs of the plan. NET COST ILLUSTRATIONS 25. Line 4 of Table 1 sets forth a summary of the dividend illustrations submitted by the companies to illustrate the operation of their current dividend or rate reduction formulas. Insurance company retentions (i.e. the amount retained by the company for administration and other costs) are shown as a percent of assumed claims figures. It should be emphasized that all of the illustrations are based on future application of present dividend formulas; and that there is no guarantee that these formulas will be continued without change. As a T O W E R S , PERRIN, FORSTER &L C R O S B Y , INC. The Federal Reserve Banks - 6 - May 2, 1951 practical matter, however, it must be realized that any insurance company will consider itself greatly favored to be selected as the insurer of this plan and will accordingly be slow to deviate adversely from the projections which it has submitted in its quotation* 26<, Table 1 shows that according to the operation of the present dividend formulas, the Prudential has the lowest net cost and that thereafter the companies appear to be in the following order: Equitable, Aetna, Metropolitan, Connecticut General, John Hancock and Travelers• SETTLEMENT OPTIONS 27• All companies provide for the payment of proceeds in installments0 Several companies offer four standard options* Several other companies offer whatever options are available in ordinary policies at the time of the claim* Still other companies indicate that they are willing to consider other options than the ones in their standard group contracto 28<, Where proceeds are under $5>000 it is doubtful whether any option other than the option for limited installments will ever be requested• For those cases where the proceeds will exceed $5>000, most companies have indicated their willingness to offer any of the current options; and it is likely that all of the companies would do this if they were specifically requested to do so o ADMINISTRATION 29o All of the insurance companies have assumed in preparing their dividend illustrations that the initial records and employee certificates will be prepared by the insurance company, but that subsequent to the initial installation the Federal Reserve System will maintain all the detailed records and prepare future employee certificates, only certain totals being reported to the insurance company« It is our recommendation that this procedure be followed by the Federal Reserve System, whatever insurance company may be selected as underwriter• 30* Concerning payment of claims, the proposals of the insurance companies reveal the following: (a) The Prudential recommends that claims be paid by Federal Reserve, by means of the draft book method* However, they indicate willingness to pay claims directly* (b) The other companies recommend that claims be paid directly by the insurance company* To some of these companies the draft book method is acceptable and to others it is not acceptable. SUMMARY 31 • Apart from the cost aspects the insurance company proposals are so uniform that in our judgment each one of the seven insurance companies under consideration would prove capable as an underwriter* Because the Prudential has a dividend formula which on a case of this size produces an insurance company retention substantially lower than that of the other companies, their proposal, in our judgment is superior to that of the other companies* T O W E R S , PERRIN, F O R S T E R & L C R O S B Y . INC. The Federal Reserve Banks - 7 - Kay 2, 1951 SECTION C: MECHANICS OF MAKING INSURANCE EFFECTIVE 32. Studies conducted by us and by the insurance companies reveal that several procedures are available under which the selected insurance company could contract to provide the death benefits* The procedures which appear to be most practical are as follows: (a) Have one of the member banks or the Board of Governors apply for a contract to provide the benefits for its employees and also for all of the other persons eligible to participate in the program* (b) Extend the coverage of one of the existing group life insurance contracts in force at one of the member banks so that the proposed additional benefits become available to the employees of the Federal Reserve System and the Board of Governors« (c) Have the present Massachusetts Trust purchase a contract to provide benefits for all of the employees of the Federal Reserve System and the Board of Governors. 33• After careful consideration of the advantages and disadvantages of each procedure, we believe that the most advantageous procedure is that described in subparagraph (a) above. Our reasons for this belief are as follows: (a) A single group life insurance contract could be written to cover all persons eligible for the coverage, (b) No problems are encountered in certain states (Ohio, Texas) which prohibit issuance of group life insurance to a trustee* (c) The contract can be written in a state which does not impose a maximum on the individual amount of insurance which may be provided through a group contract; therefore, the problem of maximum limits on individual insurance coverage is largely eliminated (see paragraph 36 below for special situation in Texas)* (d) The new contract would be entirely independent of the group insurance contracts now in force at certain banks* Therefore, the new plan would not affect nor be affected by the bank plans now in force. (e) The contract can be written in a state, such as Missouri which does not have any specific law devoted to group life insurance* It must be expected, therefore, that the greatest latitude of legal procedure would be attendant to a contract issued in such a state* 34* Insurance laws establish that a contract may not be written within the state or district to provide a benefit of more than $20,000 on any one life under a contract which may be purchased in New York, Pennsylvania, Texas or The District of Columbia* It is our understanding that these limitations do not have extraterritorial effect in New York or Pennsylvania, so that an employee residing in those states may be covered for an amount in excess of $20,000 if the contract was legal in the state in which it was issued* T O W E R S , PERRIN, FORSTER &L C R O S B Y , INC. The Federal Reserve Banks - 8 - May 2, 1951 35. We believe that in The District of Columbia, the Superintendent of Insurance has the capacity to permit coverage in excess of $20,000 if he so wishes, It is our suggestion that a conference be arranged with the Superintendent of Insurance in order to discuss this problem, 36, The Texas laws are written so as to have extra-territorial effect, and they provide that no contract shall be issued in the state to provide benefits which individually exceed $20,000, and they also provide that an individual residing in a state may not be covered by a contract which could not have been issued in the State of Texas, While there is a very real question as to the constitutionality of the extra-territorial effects of the Texas legislation, it may be necessary to place a $20,000 maximum limit on the coverage available to a Texas resident and to provide additional benefits from another source for any Texas residents who may be affected by this limit, 37. Examination of employee data indicates that out of the more than 18,000 persons prospectively eligible for inclusion in this program, 8 would now be affected by this limit. It is suggested that the additional benefit to which they would otherwise be entitled be provided from the existing trust fund, which has accumulated substantial reserves in the operation to date in the Active Service Death Benefit Plan, Since such supplementary death benefits may be subject to Federal income taxes at a capital gains rate, it would be appropriate to pay the supplementary benefits in an amount of 133$ so that the net effect after taxes would be comparable to the benefit received wholly from insurance in the case of an individual residing elsewhere than in Texas, For example, an employee with an annual salary of $25,000 would be entitled to coverage of $50,000 under this program. If he were a resident of Texas, $20,000 would be paid under the insurance program and the trust fund would then pay an additional $40,000• The $40,000 would give rise to an income tax of $10,000, leaving a net benefit to the heirs of $30,000, which when added to the $20,000 of the insurance would provide the heirs with a net death benefit of $50,000. This illustration assumes that the benefits will be taxed as long term capital gains at the prevailing 25$ rate, 38, In the event of death in this group of 8 employees, this procedure is undeniably expensive but the cost of such procedure in relation to the total cost for the entire program will be very small. The total of such supplementary benefit exposure now amounts to $96,000, 39* Since this report will be discussed with you in person, it has purposely been kept brief. We will be pleased to amplify the material contained herein and to assist you in the establishment of an improved death benefit plan. Respectfully submitted, TOWERS, PERRIN, FORSTER & CROSBY, INC, B T O W E R S , PERRIN, FORSTER & CROSBY, INC. TkBL£l THE 1EDERAL RESERVE B U K S SUMOEY OP BfSORAHCE COMHLNI REPLIES TO QDBSTIOHlialHE 2 1 3 6 5 4 8 7 L i 11 Aetna Question Connecticut General John Hancock Equitable Metropolitan Prudential L i n e Travelers e 1 2 3 4 5 Tee, except for change in disability provision. Will yoa underwrite the proposed plan exactly as outlined? If not, please describe the •edifications or limitations yoa would require and the reasons for them* Yes Yes Will yon cower all employees of the Board and the Banks tinder one contract? If so, ho*' will yoa "ord the insuring clause? Yes. Issue policy to Board and include Banks; or separate policy for Board and each bank but combining experience. Yes. Issue Policy to Board and include Banks; or to one bank and its affiliates (other Banks and Board). Will the group contract specify gross rates in accordance with the new rates promulgated by the Hew York Insurance Department to become effective July 1, 1950? If not, please quote rates that will apply. Tea. Reduction in this rate is possible at outset if new contract is combined with existing Aetna Cfroup life Plans of Banks. Insurance company retention expressed as percentage of claims. 1st Year ASSQBBd frll L>T junmix Claims •3*7,000 645,000 903,000 Concerning payment of claims, it 1Ls requested that, you indicate whether you prefer this to be d^ne by the K^fnvm^ce <•company or by the employer. Will the method of paying claims affect the dividend illusta°ations 1st 5 Year 1st 10 Yeai 1st Year Average Average Yes 1st 5 Year 1st 10 Yeax 1st Year Average Average 9.7* 12.7* 17.8* 12.9* 9.4* 7.8 12.2 9.2 9.2 7.7 7.6 7.6 7.6 6.8 9.7 6.9 6.5 Insurance company payment of olaimc Insurance company payment of claims reoovnended. Ho effect on recoHBended. Ho effect on rate dividends. reductions. 7 8 Ire your field facilities adequate for the rendering of prompt service to each of the various Banks and Branches in the System? Yes Yes. Issue policy to St. Louis Bank, include employees of affiliated Banks and Board. 23.4* 11.6 8.7 7.7 6.6 This 5.5 17.0* 11.0 8.3 1st 5 Tear 1st 10 Year 1st Year Af«rag* Average 15.0* 9.7 H.0* 9.1 onpany payment of claims reeomended. Ho effect on dividends. Averaged over all group cases. Charged directly to ease. Averaged over all group cases. Yes, Issue policy to Board or to Trustees, include employees of Board and Banks. 2 Yes Yes 1st 5 Year 1st 10 Yeax 1st Year Average Average 10.6* 11.9* 19.1* 11.4 6.7 7.5 8.2 5.6 5.1 Insurance company payment of claims recommended. Slight increase in dividends if employer pays claims. 1 Yes. Issue policy to St. Louis bank, Include employees of affiliated Banks and Board; or issue separate policy for Board, Yes 7.0 TnfnmwM company payment of claims reooMended. No effect on dividends. 6.3* 5.2 1st 5 Year Let 10 Year 1st Year Average 5.6* 5.0* 4.7 4.3 4.3 18.1* 3 1st 5 Year 1st 10 Yeax Average Average 11.5* 10,6 10.6* 4.0 Employer payment of claims recommended. Mo effect on dividends. 19.4 9,5 11.3 8,0 Insurance company payment of claims reu«em1ei1. Vo effect on rate reductions. Averaged over all group oases. Charged directly to case. 4.8 4 5 6 Fixed Period Option. Fixed Amount Option. Life Income Option. Deposit Option. Yes Yes 8,0* 6.2 Yes. Issue policy to Board and include Banks; or to one Bank and its affiliates (other Banks and Board). Yes 1st 5 Year 1st 10 Year 1st Year Average Average n.o* Yes Yes. Issue policy to trustees covering Board and Banks. Cover Texas and Oklahoma aad Ohio by separate contract. Yes. Reduction in this rate is possible at outset if new contract is combined with existing Equitable Group Life Flans of Banks. Ire premium taxes actually incurred in any Avexagsd over all group oases. Charged directly to oase. particular oase charged directly to that oase, or are all premium taxes averaged offer all group oases? Fixed amount option (other options Fixed Period Option. What optional modes of settlement would you Fixed Amount Option. nay be agreed to by insurance offer on a guaranteed basis in connection Life Income Option. company). with oayment of death claims? Deposit Option. 6 Yes Yes Fixed Peri od Option. (Other options aa j be agreed to by iniimneA company.) Tea Fixed Period. (Other options may Fixed Period Option, be agreed to by insurance company; ( H u t — 10 years). A11 options t time of claim are iilso available. Yes Yes fixed Period Option, (Other options may be agreed to by insurance company.) Yes 7 8 i s based on replies to specific questions asked in Exhibit C. The Equitable in letter of March 8, 1951, suggests combining proposed plan with existing Equitable plans for experience purposes. If this i s done, 10 year average retentions &s percent of claims are estimated as follows: Claims *387,000 1645,000 $903,000 Retention 7,1* 5.6* 4.8* TCMERS, FERR1H, FCESHSt t CROSBT, DC. PMUrteihle 7 |»y 2 . 1951 7821 TABLE 2 FLOYD r. TOOMCY FREDERIC * LEE ARTHUR M. KCNT HMMAN C • •EOEL THOMAS t . JINKS c. RUDOLF KTCRSON LAW OFFICES CASLE ADDRES f "LEETAK" LEE,TOOMEY & KENT ASSOCIATED IN FEOERAL MATTERS JOSEPH O. BLANDI RALPH A. OUCHAIIT VALENTINE IROOKCS VINCENT H. MALONCY JOHN m LIPSCOM«,JR ROBERT W. IOOUC ALFRED M. OSOOOD JOHN A.CARDON i s o o EIGHTEENTH STBEET, N. W. WASHINGTON e, D. C KENT A N D BROOKES V I N C E N T H. MALONCY I 7 I O MILLS TOWER • O EAST 4 l * f STREET SAN FRANCISCO 4. CALIF. t-7«7> NEW YORK 17, N. V. MUftHAV MILL 7 - 7 1 M November 17, 1950. Re: Retirement System of the Federal Reserve Banks Dear Mr* Shreiner: You have requested our advice on the status for Federal income tax purposes of the benefit payable under the Retirement System of the Federal Reserve Banks upon the death of a covered employee during his active service and prior to retirement. The benefit in question is described in Section 3, Paragraph (5)(a) of the Rules and Regulations of the Retirement System. In this connection you have submitted to us a copy of the Agreement and Declaration of Trust dated March 14, 1934, the Rules and Regulations governing administration of the Retirement System, and the By-laws of the Trustees and have advised us that the Retirement System and Agreement of Trust qualify as an exempt plan and trust under §165(a) of the Internal Revenue Code, as amended. Based upon our examination of the foregoing documents and the applicable provisions of law it is our opinion that so much of the death benefit described in Section 3, Paragraph (5)(a) of the Rules and Regulations as is attributable to the contributions of the Employing Bank constitutes taxable income to the recipient, and since the total distribution payable with respect to the deceased employee is made within one taxable year, the recipient may elect to have such benefit taxed at the capital gain rate. (§165(b) , I.R.C.; §29.165-6, Regs. Ill, as amended) The Bureau of Internal Revenue has explicitly held (and in our opinion, correctly) that since the death benefits in question are not provided by me*ns of an insurance policy, they would not constitute - 2 amounts received under a life insurance contract so as to be excludable from gross income under the provisions of §22(b)(l) of the Code. (P.S. No. 63, June 6, 1950) Even if this were not a §165 plan and even in the absence of the specific provisions of §165(b), death benefits payable under a plan of this type would not be considered amounts received under a life insurance contract within the meaning of 522(b)(l) of the Code but would be regarded as taxable income under §22(a) of the Code. (Varnedoe v. Allen. 158 F.(2d) 467, C C A . 5th (1946); M A T T Sutro V- United States, 30 A.F.T.R. 1618 (D.C.N.D. Calif. So. Div. 1942); I.T. 3840, 1947-1 C B . 7; I.T. 3972f 1949-2 C B . 15. £1. Conmifisioner v. Treyanowan. 183 F. (2d) 288, C C A . 2d (1950)) If you or counsel for the Federal Reserve Banks prefer a more detailed analysis of the applicable legal authorities, we shall be glad to prepare one for you. Very truly yours, Mr. J. H. Shreiner, Towers9 Perrin, Forster & Crosby, Inc., 12 South 12th Street, Philadelphia 7, Pennsylvania. January 26, 1951 EXHIBIT A CONFIDENTIAL MEMORANDUM FOR INSURANCE COMPANIES CONCERNING PROPOSED GROUP LIFE INSURANCE PLAN FOR EMPLOYEES OF THE FEDERAL RESERVE BANKS AND FEDERAL RESERVE BOARD It The Board of Governors of the Federal Reserve System has authorized us to undertake a study to determine the best method of providing death benefits for employees of the Federal Reserve System* Our present judgment is that these death benefits can best be provided by means of a group contract with an insurance company. This memorandum is being submitted to a limited list of insurance companies for the purpose of requesting certain information to be used in arriving at a choice of insurer for the proposed plan* Our proposal has not yet been officially approved by the Board of Governors, hence it is requested that all correspondence on this matter be held strictly confidential* 2# Attached is an outline of the principal provisions of our proposal, together with certain additional items of information that may be of interest to prospective insurers0 It is requested that quotations be made on the assumption that no changes will be made in the plan as outlined* Suggestions as to desirable changes in the plan as outlined will, however, be welcomeda 3. Exhibit B included herewith is a series of questions, the answers to which will have an important bearing upon the choice of an insurer* 4o Insurance companies interested in being considered as possible insurers of the proposed plan are requested to submit their replies to the questions set forth in Exhibit B o In order to receive consideration, these replies should be mailed to arrive not later than Monday, February 19th, as follows: One copy ' Mr* S o R* Carpenter, Secretary Board of Governors of the Federal Reserve System Washington 25, D, C« One copy Mr* Jo H e Shreiner, Vice President Towers, Perrin, Forster & Crosby, Inc. 12 South 12th Street Philadelphia 7, Pa, One copy Mr o Go C o Foust, Jr*, Consultant Towers, Perrin, Forster & Crosby, Inc. 12 South 12th Street Philadelphia 7, Pa* 5* Any inquiries regarding the proposed plan, or the interpretation of any of the questions, should be addressed to Mr« Shreiner or Mr, Fousto 6. It is desired that answers to the questions be mailed and not delivered in person. After the answers have been studied by the Board of Governors, interviews with insurance company representatives may be requested* TOWERS, PERRIN, FORSTER & CROSBY, INC. January 26, 1951 EXHIBIT B CONFIDENTIAL ESSENTIAL DETAILS CONCERNING PROPOSED GROUP LIFE INSURANCE PLAN FOR EMPLOYEES OF THE FEDERAL RESERVE BANKS AND THE FEDERAL RESERVE BOARD 1. Effective Date: July 1, 1951 (tentative - subject to change), 2. Eligibility: All regular employees of the Federal Reserve Banks and the Federal Reserve Board• 3. Amounts Of Insurance: Two times the basic salary of the employee during the 12 months preceding death (maximum insurance 150,000)* 4« Employee Contributions: None. 5* Retired Employees: Insurance will cease at retirement date. 6. Total And Permanent Disability; Insurance continued in full until 65; then discontinued. Premiums waived. 7. Estimated Initial Coverage: It is estimated that 18,500 employees will be eligible for a total of $113,000,000 of insurance on the effective date of the plan. These employees are distributed by locations as shown on the accompanying sheet. 8. Estimated Gross Premiums: It is estimated that the initial gross annual premiunTfor $113,000,000 of insurance will be $1,290,000 according to the new group life insurance rates promulgated by the New York Insurance Department, effective July 1, 1950. 9* Existing Coverages: The proposed new plan will not affect nor be • group life insurance contracts now in force at the folloi Bank Maximum Insurance Per Life Atlanta Cleveland Minneapolis New York Philadelphia Richmond San Francisco St. Louis $5,000 2,500 10,000 6,000 5,000 5,000 4,000 6,000 Group Insurance Underwriter Aetna Travelers Equitable Equitable Aetna Aetna Aetna Equitable Note: The remaining 4 Banks (Boston, Dallas, Chicago, and Kansas City) do not have group life insurance plans. T O W E R S , PERRIN, FORSTER & CROSBY, INC. January, 26, ^.951 EXHIBIT B-l CONFIDENTIAL THE FEDERAL RESERVE BANKS Banks Branches Boston Approximate Number Of Employees On January 1, 1951 1,274 New York Buffalo 3,458 182 Philadelphia 1,040 Cleveland Cincinnati Pittsburgh 936 300 455 Richmond Baltimore Charlotte 780 286 182 New Orleans Jacksonville Birmingham Nashville 182 156 130 130 Atlanta 442 Chicago 2,264 325 Detroit St. Louis Louisville Memphis Little Rock 754 156 130 104 Minneapolis Helena 546 52 624 156 156 Kansas City Omaha Denver Oklahoma City- 182 Dallas 624 El Paso Houston San Antonio San Francisco Los Angeles Portland Salt Lake City Seattle Federal Reserve Board (Bank Plan) Rederal Reserve Board (Board Plan) Retirement Office 78 156 130 728 468 150 182 235 15 468 15 TOTAL TOWERS, PERRIN, FORSTER & CROSBY, INC- 18,631 January 26, 1951 EXHIBIT C CONFIDENTIAL QUESTIONS FOR INSURANCE COMPANIES AS TO UNDERWRITING OF PROPOSED GROUP LIFE INSURANCE PLAN FOR MPLOYEES OF THE FEDERAL RESERVE BANKS AND THE FEDERAL RESERVE BOARD 1. Will you underwrite the proposed plan exactly as Outlined? If not, please describe the modifications or limitations you would require and the reasons for themo 2* Will you cover all employees of the Board and the Banks under one contract? If so, how will you word the insuring clause? 3o Will the group contract specify gross rates in accordance wittTthe new rates promulgated by the New York Insurance Department to become effective July 1, 1950? If not, please quote rates that will apply, 4* Please submit a table of "dividend illustrations11 based upon your present dividend or rate reduction formula0 The tables should be based on an assumed initial annual gross premium of $1,290,000. These illustrations should be submitted in the following form: Policy Year 1 2 3 4 5 6 7 8 9 10 Gross Premiums Dividend Or Rate Reduction For Policy Year If "Claims" Are $387,000 $645,000 $903,000 $1,290,000 Note "Claims" should be assumed to include cash claims plus whatever reserves are held specifically against outstanding or unreported claims that are returnable in event of termination of the contract (less deduction of any actual claims)„ In addition, "claims" should be assumed to include "conversion charges". It should also be assumed that initial records and employee certificates will be prepared by the insurance company; but that subsequent to the initial installation, the employer will maintain all the detailed records and prepare future employee certificates, only certain totals being reported to the insurance company. T O W E R S , PERRIN, FORSTER & C R O S B Y , INC. EXHIBIT C (CONT«) -2- January 26, 1951 5o Concering payment of claims, it is requested that you indicate whether you prefer this to be done by the insurance company or by the employer • Will the method of paying claims affect the dividend illustrations above? 6. Are premium taxes actually incurred in any particular case charged directly to that case, or are all premium taxes averaged over all group cases? 7o What optional modes of settlement would you offer on a guaranteed basis in connection with payment of death claims? 8o Are your field facilities adequate for the rendering of prompt service to each of the various Banks and Branches in the System? 9o Please provide a brief summary of reasons why your Company should be selected as the underwriter of the proposed plan. TOWERS, PERRIN, FORSTER & CROSBY, INC.
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