Life Insurers Present Guidance Wish List to IRS

June 3, 2022

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2022-21)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Notice 2022-21, 2022-2023 Priority Guidance Plan (“PGP”) Recommendations

Dear Sir/Madam:

On behalf of the American Council of Life Insurers (“ACLI”), we write to request that the items described below be included in the PGP for 2022-2023. Additionally, we wish to express our support for the Committee of Annuity Insurers' recommendations for inclusion in the 2022-2023 PGP.

We appreciate the opportunity to provide information and recognize the IRS' need to prioritize resources. We have limited our recommendations to the items most important to meeting the criteria set forth in Notice 2022-21. Our requested guidance is relevant to a broad class of taxpayers and will greatly reduce controversy and complexity for both taxpayers and the Internal Revenue Service (“IRS”). While life insurers are subject to the rules generally applicable to C corporations, they are also subject to rules unique to life insurance companies under subchapter L. Additionally, specific rules apply to the guaranteed financial security and retirement products we offer consumers, which includes individual taxpayers of all income levels. While the general guidance the Treasury Department (“Treasury”) and IRS issue serves our industry and its consumers as taxpayers generally, guidance specific to our industry is vital to the efficient functioning of our industry on behalf of the 90 million American families who rely on our products to protect their financial and retirement security. Life insurers provide consumers with guarantees they can rely on. Benefits paid out in 2020 were the highest in history and the biggest jump — an increase of more than 15 percent between 2019 and 2020 — since the influenza of 1918. The industry's long-term approach to investments, in order to keep its promises, make it a major source of patient capital with $7.4 trillion invested in the U.S. economy.

We make the recommendations below as we work to expand access to life insurance, retirement savings products including lifetime income, long-term care, disability income, and supplemental benefits that help to bridge gaps for middle-income families and drive financial inclusion. The first six areas are topics which we've previously addressed with the IRS. Our comments here focus on issues that remain unaddressed and unresolved. And there's one new item that was not included on the 2021-2022 PGP. It is related to late Schedule K-1s.

Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) and Required Minimum Distribution (“RMD”) Guidance

We thank the Treasury and IRS for the proposed RMD regulations published in the Federal Register on February 24, 2022 and commend the efforts of the Treasury and IRS in issuing the proposed regulations. Additional guidance relating to SECURE Act provisions and revisions to the proposed RMD regulations is needed. We request that final regulations consider and adopt recommendations made in the joint-trade-associations letter submitted March 25, 2022¹ and our comment letter submitted on May 25, 2022 (the “letters”). We ask that the deadline to make changes to qualified plan and IRA documents to conform to the SECURE Act be delayed until at least one full plan year (one calendar year for IRAs) from the later of (1) the effective date of final RMD regulations or (2) the date the IRS publishes updated Listings of Required Modifications (“LRMs”). Absent relief from the Treasury and IRS, qualified plans and IRAs must amend their governing documents to comply with legislative changes under the SECURE Act by the end of 2022. The typical challenges associated with updates to these governing documents — including the creation and successful completion of associated complex work streams and obtaining approvals from state regulators with respect to modified annuity contracts underlying these plans — are compounded by the lack of LRMs and insufficient time to review, analyze and implement the yet-to-be-issued final RMD regulations.

Plans and IRA providers often rely heavily on IRS model language within the LRMs to ensure contemplated amendments conform to applicable federal tax rules. Additionally, the IRS's IRA prototype approval program is another valuable, yet temporarily unavailable, compliance tool for IRA providers. Furthermore, many IRA providers use the IRS model custodial agreements and endorsements such as those found within the Form 5305 series. These model forms permit providers of Traditional, Roth, and SEP-IRAs to adopt amendments without the need for review by outside counsel, thus leveling the playing field for IRA providers of all sizes. However, any modification to the forms which includes those required by the SECURE Act and these proposed regulations, removes them from the safe harbor and puts those firms at risk. The model forms have yet to be updated by the IRS and even if they were to be updated ahead of the December 31, 2022 deadline, there would not be enough time for IRS providers to send the updated forms to clients.

Changes to the Life-Nonlife Consolidated Return Regulations

ACLI maintains that certain aspects of the life-nonlife consolidated return regulations (§ 1.1502-47²), which affect almost every major U.S. insurance group, are outdated, unnecessary, and in need of fundamental revision. While these regulations were updated in 2020,³ their substantive provisions have remained virtually unchanged since they were promulgated nearly 40 years ago, despite significant subsequent changes to the taxation of both life and property and casualty insurance companies dating back to the 1980s. Failure of the life-nonlife consolidated return regulations to keep pace with enacted statutory law changes — and with changes to the consolidated return regulations over the past four decades that apply to taxpayers generally — have made the life-nonlife regulations difficult for taxpayers to apply and for the IRS to administer. The changes that ACLI recommends would improve clarity and understandability for both taxpayers and the government, thereby reducing controversy and promoting sound tax administration through more consistent application of the rules. They would also reduce or eliminate unnecessary disparities — beyond the differences prescribed by the Code — between life-nonlife consolidated groups and other types of consolidated groups.

For several years, the PGP has included a project on: “Regulations regarding life-nonlife consolidated groups under § 1.1502-47,” however, the scope of the project is unclear. The preamble to T.D. 9927 indicated that Treasury and the IRS would appreciate input, and welcome further comments, regarding substantive changes to § 1.1502-47 for purposes of potential further guidance. Accordingly, ACLI continues to urge that the scope of the current PGP project include substantive changes to § 1.1502-47 necessitated by statutory changes over the past 40 years and by the evolution of the consolidated return regulations. ACLI believes fundamental revisions to the life-nonlife regulations should be made by this PGP project. The life-nonlife regulations deal with the determination, allocation and utilization of losses among the members of a life-nonlife group. ACLI believes it essential that the regulations focus on implementing the loss limitations that are specifically required by the statutory provisions of the Code, but otherwise, to the extent possible, incorporate “normal” consolidated return principles applicable to consolidated groups generally. ACLI's recommendations are directed towards those ends.

Substantive changes to the life-nonlife regulations advocated by ACLI include the following:

• Apply “normal” consolidated return loss allocation rules to losses of eligible and ineligible nonlife members;

• Apply SRLY principles to utilization of ineligible nonlife losses, including in the context of acquired nonlife groups;

• Apply “normal” consolidated return rules to allow the netting of capital losses against capital gains of all members of the group; and

• Simplify the eligibility and tacking rules.

Proposed Regulations under § 382 Related to Built-In Gain and Loss

The PGP includes a project for guidance under Code § 382(h)(6) for which proposed regulations were published in September 2019 and January 2020. The proposed regulations provide guidance regarding the items of income and deduction that are included in the calculation of built-in gains and losses under § 382 of the Code for corporations that experience an ownership change under § 382. ACLI submitted comments on the proposed regulations in a letter dated November 11, 2019.

The ACLI comment letter made the following points with respect to application of the proposed regulations to an acquisition of a life insurance business:

• The computation of net unrealized built-in gain (“NUBIG”) and net unrealized built-in loss (“NUBIL”) under the proposed regulations' assumption of a hypothetical sale of assets at fair market value to an unrelated third party that assumes no liabilities is unworkable in the context of acquisition of a life insurance business. A sale of insurance contracts is effectuated through a reinsurance transaction, which necessarily requires an assumption of the obligations under the contracts.

• Existing regulations recognize that tax deductible reserves, as determined under the requirements of Subchapter L of the Code, are the proper measure for valuing the intangible asset for in-force insurance contracts (“value of insurance in-force” or “VIF”) for other Federal income tax purposes and should likewise be the measure of VIF for purposes of § 382. Such deductible tax reserves should not be treated either as a non-contingent liability or as a contingent liability in computing NUBIG or NUBIL. Instead, they should be taken into account in the same manner as a deductible accrued liability.

If final regulations retain the approach set forth in the proposed regulations,⁴ ACLI recommends that a life insurance company exception be added to the final regulations that would:

• Recognize that in a hypothetical sale of insurance contracts by a life insurance company a hypothetical buyer would necessarily have to assume the liabilities under the contracts;

• Incorporate the principles set forth in existing regulations relating to a hypothetical sale of insurance contracts treating a deemed sale as an assumption reinsurance transaction and using tax reserves in determining the value of the insurance contracts; and

• Recognize that the Code specifically prescribes rules for the determination of tax reserves deductible by a life insurance company, and that increases or decreases in such prescribed deductible amounts should be taken into account in the deemed sale in the same manner as a deductible accrued liability.

ACLI's previous comment letter also maintained that the proposed regulations violate the “neutrality principle” underlying the statutory provisions of § 382 by denying, except in the case of a disposition, recognition of intangible assets such as VIF as recognized built-in gain as they are earned during the recognition period. ACLI further recommends that final regulations make allowance for such recognition.

Guidance under § 954, Including Foreign Base Company Sales and Services Income, and the Use of Foreign Statement Reserves for Purposes of Measuring Qualified Insurance Income under § 954(i)

Since 2017, PGPs have anticipated, and ACLI has sought guidance for taxpayers seeking to use foreign statement reserves for purposes of calculating the amount of income that qualifies as an exception to the Subpart F rules under § 954(i) of the Code. The need for guidance is enhanced given statutory changes to § 807(d) effective in 2018 and the lack of clarity as to how those changes affect the § 954(i) calculation. ACLI believes guidance in this area would preserve substantial IRS and taxpayer resources.

Tax Treatment of State Paid Family and Medical Leave (“PFML”) Programs

The IRS has included guidance on contributions to and benefits from paid family and medical leave programs since its October 8, 2019 update to its Priority Guidance Plan. We ask that such guidance remain a priority on contributions to and benefits from paid family and medical leave programs. Many state programs are coming online with benefits paid by a private insurance company or the self-insured plan of employers. Lack of guidance in this emerging area has led to varying positions among state programs and private insurance programs, creating conflict between states and insurers. Some states have taken a position as to the federal tax treatment, such as New York, which has issued guidance that private paid family leave is reportable on Form 1099-MISC, is not subject to FICA tax, and is subject to voluntary federal income tax withholding. This state guidance is not supported by any federal guidance. Other states have publicly admitted that they do not know the federal tax treatment of the benefits and are waiting for Treasury and IRS to issue federal guidance. Private insurers issuing PFML products need IRS clarification on the tax treatment of contributions made to PFML programs and of benefits paid from such programs, including whether to characterize PFML benefits as either wage replacement or wage continuation under the regulatory definitions.

Reserve Reporting

T.D. 9911, published during 2020, provided rules regarding the computation and reporting of reserves for life insurance companies.

One of the areas addressed by T.D. 9911 was reporting of reserves. Specifically, § 1.807-3 provides that the IRS may require life insurance company reporting with respect to the opening and closing balances of reserve items described in § 807(c), and with respect to the method of computing such items for the purposes of determining income. It also states that such reporting may provide for the way separate account items are reported.

ACLI's comments on the proposed regulations expressed the life insurance industry's view that any additional reserve reporting requirements should properly balance the burden on companies with the utility of the information provided to the government and encouraged further consultation with the industry before specific reserve reporting requirements are put into effect. The preamble to the final regulations states: 1) that the IRS understands the importance of obtaining the life insurance industry's input before imposing reserve reporting requirements, and 2) that the IRS expects to consult with the industry before imposing such requirements. Accordingly, additional reserve reporting information is not yet required to be filed on Form 1120-L, U.S. Life Insurance Company Income Tax Return.

ACLI is not advocating that a reserve reporting project be included in the PGP but is taking this opportunity to reiterate the life insurance industry's request that any future reserve reporting requirements be developed in conjunction with industry input and with recognition of the utility of such reporting and the burden of compliance.

Partnership Late K-1 Reporting

We request IRS guidance to establish a consistent, practical and administrable process for both taxpayers and the IRS that does not require a company to file amended returns every time a Schedule K-1 is received after it is too late to include it in their return. Additionally, we would welcome additional discussions on our suggestion of a “new form” for reporting any post filing changes as part of the following year's return. This request is addressed in greater detail in the joint insurance trades⁵ letter submitted to the Commissioner of the Large Business & International Division of the IRS on May 11, 2022.

Partnership reporting is a matter of significant importance to our industry. The insurance industry accounts for a substantial number of investments in or sponsorships of entities treated as partnerships for U.S. federal income tax purposes. As investors in partnerships, mostly as limited partners, we collect tens of thousands of Schedule K-1s each year. As sponsors or general partners of investment fund entities, our members are also charged with the filing of numerous partnership tax returns and Schedule K-1s annually.

A substantial portion of the Schedule K-1s insurance companies receive are provided too late for insurers to properly report the data contained therein on their extended tax returns. This problem arises in part because many investment partnerships are multi-tiered partnerships, with all tiers having the same due date, making it virtually impossible for all partnership returns in a multi-tiered arrangement to be timely filed when the lowest tier partnership return is filed on its extended due date. Even with the 30-day difference in due dates for insurance company returns and partnership returns, there is not nearly enough time for K-1 information to reach insurers to be timely included in insurer returns. Accounting for the late Schedule K-1s is not solely a matter of correctly calculating taxable income and filing amended returns. It also involves completing and filing ancillary forms, foreign disclosures and elections. Late Schedule K-1s add additional work and complexity for insurers and the IRS.

Proposed regulations, REG-118250-20, were published in the Federal Register on January 25, 2022, (the “proposed PFIC regs”) regarding the treatment of passive foreign investment companies (“PFICs”). The proposed PFIC regs would dramatically increase the complexities associated with late Schedule K-1s and burden partners with tracking down PFIC information that is not readily available in a concise or timely manner. They would require each individual insurer which is a partner to be responsible for its own reporting, elections, and inclusions with respect to each separate PFIC held by a domestic partnership. This would exponentially increase the amount of information insurance companies will need to track down and document annually. As a practical matter, the Schedule K-1s are not received in a timely fashion and do not provide enough information to carry out the PFIC-related proposed responsibilities at the partner level. The domestic partnership is generally better suited to carry out these responsibilities and has better access to information as to whether a foreign corporation is a PFIC relative to the partner.⁶ The proposed regulations increase the need for the IRS to issue guidance in this area.

As we stated in our recommendations last year, in the interest of conserving resources, we note that the previous PGPs included one insurance-related item for which the industry believes no guidance is necessary. That item is guidance on the exchange of property for an annuity contract, which was the subject of regulations proposed in 2006. At this point, we are unaware of controversy in this area, nor are we aware of any burden these transactions impose on tax administration. You might wish to consider removing the item from the 2022-2023 and future PGPs in favor of issues for which guidance is more urgent.

Thank you for your time on, and attention to, these recommendations for the 2022-2023 PGP. We welcome the opportunity to discuss our recommendations and to work with you on these issues in the coming months.

Sincerely,

Regina Y. Rose

Mandana Parsazad

Sarah Lashley
American Council of Life Insurers
Washington, DC