IRS Issues Pre-Released Version of Final Regs on Life Insurance Reserves

IRS Issues Pre-Released Version of Final Regs on Life Insurance Reserves

Internal Revenue Service

The IRS has issued a pre-released version of final regulations (T.D. 9911) that provide guidance on the computation of life insurance reserves and the change in basis of computing some reserves of insurance companies to reflect recent legislative changes to the code. The final regs adopt, with some amendments, proposed regs (<a href="/lr/resolve//2cc6l">REG-132529-17</a>) issued in April. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. Section 807(d) provides the method of computing life insurance reserves for purposes of determining the income of an insurance company subject to federal income tax under subchapter L. Under section 807(d)(1)(A), the amount of life insurance reserves for a life insurance contract (other than a variable contract subject to section 807(d)(1)(B)) is generally the greater of (A) the net surrender value of the contract, or (B) 92.81 percent of the reserve determined under the tax-reserve method applicable to the contract under section 807(d)(3). Amendments to section 807 by the Tax Cuts and Jobs Act apply to tax years beginning after December 31, 2017.  The proposed regs provide that no asset adequacy reserve may be included in the determination of the amount of life insurance reserves under section 807(d). The final regs adopt a suggestion to amend the proposed regs by providing that asset adequacy reserves are those reserves established under a reserve adequacy analysis only if that analysis is made in accordance with the requirements of Valuation Manual 30 from the National Association of Insurance Commissioners (NAIC). The final regs also adopt a recommendation to specify what an asset adequacy reserve is rather than what it includes. The final regs remove language that includes within the definition of asset adequacy reserve any reserve that is not held regarding a particular contract. However, the final regs also incorporate in the definition any reserve that is similar to an asset adequacy reserve that is determined under the NAIC’s requirements as of the date the reserve is determined. The final regs adopt a suggestion to add a general provision explaining the significance and selection of the tax reserve method for a contract. The IRS and Treasury declined to add an example illustrating the determination of life insurance reserves under section 807(d)(1) and the exclusion of asset adequacy reserves from life insurance reserves. However, the principles illustrated by the proposed example are explained in the preamble. The final regs incorporate a suggestion asking that reg. section 1.807-4(a) specify at the outset that section 807(f) treats a change in basis of computing reserves as a change in method of accounting. The IRS and Treasury agreed with a commentator who recommended further consultation with the life insurance industry before any additional reserve reporting requirements are implemented. Treasury and the IRS also acknowledged that some factors other than those prescribed by section 816(b)(1) and (b)(2) may be taken into account in determining life insurance reserves for tax years before the effective date of the final regs if the use of those factors would make the calculation of the reserve more accurate. The proposed regs would have removed reg. section 1.6012-2(c)(4), which prohibits an insurance company that electronically files its Form 1120-L, “U.S. Life Insurance Company Income Tax Return,” or Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” from attaching its annual statement (or pro forma annual statement) to its return. The final regs retain that provision but now indicate that electronic filers must file their annual statement or a portion of it in accordance with the applicable rules in the forms or instructions.

T.D. 9911, which was posted to the Federal Register website on October 9, 2020, is the <a href="/lr/resolve//2d1vy">official version</a> of the final regs.

The IRS has issued a pre-released version of final regulations (T.D. 9911) that provide guidance on the computation of life insurance reserves and the change in basis of computing some reserves of insurance companies to reflect recent legislative changes to the Internal Revenue Code.

The IRS has issued a pre-released version of final regulations (T.D. 9911) that provide guidance on the computation of life insurance reserves and the change in basis of computing some reserves of insurance companies to reflect recent legislative changes to the code. The final regs adopt, with some amendments, proposed regs (REG-132529-17) issued in April. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. Section 807(d) provides the method of computing life insurance reserves for purposes of determining the income of an insurance company subject to federal income tax under subchapter L. Under section 807(d)(1)(A), the amount of life insurance reserves for a life insurance contract (other than a variable contract subject to section 807(d)(1)(B)) is generally the greater of (A) the net surrender value of the contract, or (B) 92.81 percent of the reserve determined under the tax-reserve method applicable to the contract under section 807(d)(3). Amendments to section 807 by the Tax Cuts and Jobs Act apply to tax years beginning after December 31, 2017.  The proposed regs provide that no asset adequacy reserve may be included in the determination of the amount of life insurance reserves under section 807(d). The final regs adopt a suggestion to amend the proposed regs by providing that asset adequacy reserves are those reserves established under a reserve adequacy analysis only if that analysis is made in accordance with the requirements of Valuation Manual 30 from the National Association of Insurance Commissioners (NAIC). The final regs also adopt a recommendation to specify what an asset adequacy reserve is rather than what it includes. The final regs remove language that includes within the definition of asset adequacy reserve any reserve that is not held regarding a particular contract. However, the final regs also incorporate in the definition any reserve that is similar to an asset adequacy reserve that is determined under the NAIC’s requirements as of the date the reserve is determined. The final regs adopt a suggestion to add a general provision explaining the significance and selection of the tax reserve method for a contract. The IRS and Treasury declined to add an example illustrating the determination of life insurance reserves under section 807(d)(1) and the exclusion of asset adequacy reserves from life insurance reserves. However, the principles illustrated by the proposed example are explained in the preamble. The final regs incorporate a suggestion asking that reg. section 1.807-4(a) specify at the outset that section 807(f) treats a change in basis of computing reserves as a change in method of accounting. The IRS and Treasury agreed with a commentator who recommended further consultation with the life insurance industry before any additional reserve reporting requirements are implemented. Treasury and the IRS also acknowledged that some factors other than those prescribed by section 816(b)(1) and (b)(2) may be taken into account in determining life insurance reserves for tax years before the effective date of the final regs if the use of those factors would make the calculation of the reserve more accurate. The proposed regs would have removed reg. section 1.6012-2(c)(4), which prohibits an insurance company that electronically files its Form 1120-L, “U.S. Life Insurance Company Income Tax Return,” or Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” from attaching its annual statement (or pro forma annual statement) to its return. The final regs retain that provision but now indicate that electronic filers must file their annual statement or a portion of it in accordance with the applicable rules in the forms or instructions. 

Sec. 807 Rules for certain reserves

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IRS Issues Pre-Released Version of Final Regs on Life Insurance Reserves