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April 24, 2002, 2:38PM

Enron utility's 'dead peasant' policies rankle
By L.M. SIXEL
Copyright 2002 Houston Chronicle
When workers at Portland General die, there's a little more money to spend on the top executives of the Enron subsidiary.

The utility has bought life insurance policies on the lives of its rank-and-file employees where the company is the beneficiary when an employee dies. That money goes for special compensation and retirement benefits for its top executives and directors.

That's a galling realization for workers, many of whom bet their retirement on Enron stock, which cratered last year as the Houston energy giant slid into bankruptcy.

The company says its use of this life insurance program is legal in Oregon and was properly disclosed to employees.

But workers sounded surprised when told about it Tuesday.

"Good God!" shouted Tim Ramsey, a 56-year-old power tester who was reached by phone in Portland.

Ramsey is one of the many workers who has sued the company after he lost $1 million in his 401(k) account because he had put most of it in Enron stock.

The fact Portland General bought such policies isn't extraordinary.

Many companies have bought corporate-owned life insurance, which is also known as "dead peasant" or "dead janitor" insurance. The nicknames reflect the fact that these policies are on low-ranking employees, rather than the top-ranking executives whose death could be a financial blow to the company.

While Texas law bans "dead peasant" coverage on most workers here, Oregon is one of the many states that allow it.

While employees said they'd never heard of the company's program, Portland General spokesman Kregg Arntson said its employees signed consent forms allowing the company to insure their lives.

That didn't make a big impression with Gary Kemper, a foreman at the company's maintenance center. When asked if he'd been told about company-owned life insurance, he said, "I don't know a thing about it."

Kemper, who lost $200,000 in his 401(k) plan when Enron stock plunged, has also sued the company seeking compensation for his retirement savings plan loss.

The Portland General fund has set aside nearly $80 million for two purposes:

\ufffd About three-quarters of the money goes for a long-term compensation plan for managers, directors and top officials.

\ufffd The rest helps pay for supplemental executive retirement payments.

This approach is used by Portland General to reward top executives with more than just their 401(k) and the traditional defined benefit pensions that are allowed by federal pension laws, which cap how much the company can contribute to the benefits.

Money from its "dead peasant" policies fund what are known as nonqualified deferred compensation plans. The advantage of these plans is that the limits on 401(k) and pension plans don't apply.

"Corporate-owned life insurance enables companies to recover the cost of nonqualified benefit plans that provide additional income and benefits to key and highly compensated employees," boasts Northwestern Mutual's Web site, which has a section promoting them.

And the cash value component of the company-owned plans -- which build up value like a whole-life insurance policy -- is an asset that can be used to offset liabilities, like promises to make enhanced executive retirement payments, according to the Travelers Life & Annuity Web site promoting them.

The company-owned life insurance, and the nonqualified compensation program, go back to the mid-1980s.

Arntson wouldn't reveal the details of the compensation packages, saying they're "internal employee matters."

The insurance policies, which are now called "Trust Owned Life Insurance," are currently in effect and also continue to cover the lives of ex-employees, he said.

Scott Simms, another Portland General spokesman, said the money was put in a trust and cannot be moved to compensate employees who lost money in their 401(k) accounts. Besides, Simms said many senior executives also suffered big losses on Enron stock.

The Internal Revenue Service has sued several companies that bought company-owned life policies, challenging their deduction of the interest cost. In each case, when the companies have sued the IRS to recover the money they had to pay in back taxes, the courts have said the insurance was a tax dodge, said Mike Myers, a lawyer with McClanahan & Clearman in Houston. He has sued Wal-Mart on behalf of Texas families seeking to collect the insurance proceeds that went to the big retailer.

But one of the companies that ran into tax trouble with the IRS is annoyed that it is lumped in with the "bad guys" when it used this life insurance strategy to fund another type of benefit plan.

American Electric Power in Columbus, Ohio, bought company-owned life insurance policies in 1990 to deal with the surging cost of medical benefits for retirees.

AEP spokesman Pat Hemlepp said the utility was faced with the choice of either eliminating the benefits or raising electric rates if it didn't use this approach. AEP has extensive properties in Texas.

Utility officials discussed the options in public meetings with representatives of the state agencies that regulate the utility, sent letters to all employees and did an article about the policies in its in-house paper.

"We were not trying to hide it," said Hemlepp.

While the policies are no longer in effect, the utility announced it would include $317 million reflecting six years of back taxes in its earnings for 2000. The company has appealed to the 6th U.S. Circuit Court of Appeals.

"Our heart was in the right place," said Hemlepp. "The employees understood what we were doing."


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April 23, 2002, 8:59PM

Bill targets 'dead peasant' life insurance policies
By L.M. SIXEL
Copyright 2002 Houston Chronicle
U.S. Rep. Gene Green, D.-Houston, introduced a bill Tuesday that would require employers to notify employees within 30 days if they buy corporate owned life insurance on the lives of their employees.

The insurance, which is also known as "dead peasant" or "dead janitor," insurance, is commonly purchased by companies that receive the death benefits when rank and file employees die. Employers often use the tax-free death benefits to fund executive compensation plans.

For policies currently in effect, employers would have 90 days to notify employees that the company has taken a policy out on their lives, according to the Life Insurance Employee Notification Act. That would cover policies purchased between Jan. 1, 1985 to the present, said Green.

The Federal Trade Commission would have the enforcement responsibility.

Laurie Lewis, chief counsel of federal taxes for the American Council of Life Insurers in Washington, D.C., said she hadn't seen the bill Tuesday afternoon. But she said she would encourage all states to examine whether they should require employers to tell employees about their company owned life insurance policies.

Green said his next goal will be to demand that the beneficiaries of the policies be the individual employees. Ultimately he would like the laws that govern life insurance to follow the strict guidelines Texas has on "insurability interest."

In Texas, only relatives, creditors and those with a reasonable expectation of a financial benefit from the continued life of another can take out policies. The courts have ruled employers don't have that financial interest in a low level employee in Texas, but it's legal for key executives.

Currently only five states have laws that require employee consent: California, Ohio, Illinois, Minnesota and Michigan.

Green said he plans to send out "Dear Colleague" letters to attract co-sponsors. He has previously asked the Internal Revenue Service to investigate the use of this sort of life insurance policy policies.