Life Insurers Suggest Items for Inclusion on Guidance Plan

June 7, 2019

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2018-43)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Notice 2019-30, 2019-2020 Priority Guidance Plan (PGP) Recommendations

Dear Sir/Madam:

On behalf of the American Council of Life Insurers (ACLI),¹ we request that the items described below be included on your Priority Guidance Plan (PGP) list for 2019-2020. Our recommendations take into account the enactment of P.L. 115-97 (the Tax Cuts and Jobs Act) and the requirements and restrictions placed on the issuance of administrative guidance by Executive Orders 13771, 13777, and 13789.

In this letter, we have limited our request to those issues that are the most significant and that offer the greatest opportunity to reduce controversy and lessen the burdens on both taxpayers and the Internal Revenue Service (IRS). ACLI has previously requested guidance for the issues set forth in this letter. However, in some cases, the need for guidance has been further increased by tax law changes enacted by the Tax Cuts and Jobs Act.

A. Guidance under §807

We appreciate the guidance provided by Rev. Proc. 2019-10 concerning changes in basis for computing reserves under §807(f), and the opportunity to continue to discuss issues that arise under the Tax Cuts and Jobs Act (TCJA) amendments to that provision. In addition, we think it would be appropriate to update the situations addressed and guidance provided in Rev. Rul. 94-74. Although the TCJA did not change the longstanding standards for determining what is a change in basis under §807(f), changes in law have rendered some of the situations in Rev. Rul. 94-74 obsolete, and changes in NAIC-prescribed reserve methodologies require companies to apply those standards to new fact patterns.

We note that in addition to guidance under §807(f), the 2018-2019 Priority Guidance Plan also anticipated "guidance under §807 regarding the determination of life insurance reserves for life insurance and annuity contracts, including guidance to implement changes under §13517 of the TCJA." Nearly any guidance in this area would require specialized knowledge of both the actuarial standards that apply to the determination of life insurance reserves and the information gathering and reporting that could follow from various requirements. We urge IRS and Treasury to seek input from the life insurance industry to provide any background information that would be useful on these issues as they are being considered for guidance.

B. 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)

The 2017-2018 and 2018-2019 PGPs anticipate 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 Internal Revenue Code. We continue to believe that the IRS and the industry will be better served by guidance that would replace, in most circumstances, the private letter ruling process that has been utilized for this purpose for many years. The need for guidance is enhanced given the changes made by the TCJA to §807(d) and the lack of clarity in how those changes affect the §954(i) calculation. Guidance in this area can ultimately preserve substantial IRS and taxpayer resources.²

Guidance for this project may be issued in the form of a revenue procedure to allow updates (additions to or removal of foreign statement reserves methodologies, or other principles used to determine appropriate reserves) to ensure the proper administration of tax policy as warranted. We look forward to working with you to develop principles for using foreign statement reserves for purposes of measuring insurance company Subpart F income.

C. Changes to the Life/Nonlife Consolidated Return Regulations

ACLI has long maintained that tax law changes to the taxation of insurance companies dating back to the 1980's have rendered outdated and unnecessary those statutory provisions that limit full consolidation of life insurance companies with nonlife insurance companies (IRC §§1503(c) and 1504(c)(2)). In the absence of repeal of those provisions, ACLI also has consistently advocated for updating the life/nonlife consolidated return regulations (§1.1502-47). This updating is required not only to take into account changes to the Internal Revenue Code since the regulations were promulgated, but also to take into account changes to the consolidated return regulations that apply to all other taxpayers. In principle, the life/nonlife consolidated return regulations should implement the statutory provisions in a way that is as consistent as possible with the rules that apply to other corporate taxpayers filing consolidated returns.

We appreciate the IRS's consideration of longstanding industry requests for modifications to the regulations, and the recent dialogue we have had to date as you are considering changes made necessary by the TCJA. As explained, tax law changes since the 1983 promulgation of the life/nonlife consolidated return regulations, have eroded the underpinning of multiple aspects of the regulations, such that the regulations still include features designed to address concerns which no longer exist. Further, the regulations do not take into account 35 years' worth of changes to the consolidated return regulations that apply to other corporate taxpayers generally. The regulations urgently need to be updated to apply to life/nonlife consolidated groups the same rules that apply to other groups, except as specifically required by the statutory limitations of §§ 1503(c) and 1504(c)(2).

D. Required Minimum Distribution Guidance

Changes still are needed to the Required Minimum Distribution (RMD) regulations to modify the minimum income threshold test (MITT) to remove barriers to annuitization at later ages. The current MITT rules are preventing individuals from receiving common forms of life annuities in arbitrary circumstances that do not involve inappropriate deferral. This situation is impairing the retirement security of American savers.

More specifically, improvements in mortality, coupled with historically low interest rates, have made compliance with the minimum distribution rules promulgated under §401(a)(9) impossible for many annuity payment streams that were permissible when these rules were first developed. The rules now limit the use of guarantee periods and return of premium death benefits, severely constraining the use of annuities with even modest annual increases and making annuitization less attractive when compared to the required minimum payments for non-annuity arrangements. It is important that the IRS amend the rules to address improvements in longevity and to eliminate the rules' distortive application in the face of unusual interest rate developments.

E. Pension Protection Act Guidance: Combined Annuity-Long-term Care Contracts and Exchanges of Annuities for Long-term Care Insurance

The changes made under §844 of the Pension Protection Act of 2006, P.L. 109-280 (PPA of 2006), permitting issuance of contracts that combine life insurance, annuity, and qualified long-term care coverages and providing for the expansion of §1035 tax-free exchanges to include qualified long-term care insurance contracts became effective January 1, 2010. On that date, policyholders also became able to exchange their life insurance and annuity contracts for qualified long-term care insurance contracts. This additional category of policy options provides essential flexibility to policyholders whose insurance needs change over time.

ACLI has requested guidance on the tax treatment of annuity contracts with a long-term care rider and on the exchanges of annuities for long-term care insurance contracts since 2009. Treasury and IRS have included guidance on annuity contracts with a long-term care feature as a project on the PGP since November 2009.³ Treasury, IRS, and the ACLI have each devoted time and resources to discuss and develop guidance on the income tax consequences of basic policy transactions needed to establish appropriate tax reporting systems and to advise policyholders of the tax consequences of policy ownership. We reiterate the continued need for guidance the industry believes is critical to providing potential policyholders with new, more affordable options for long-term care insurance coverage. Predictability of federal tax treatment for a combined annuity/long-term care insurance policy is a necessary feature for policyholders who seek to protect their retirement savings by planning for their long-term care needs. Similarly, predictability of federal tax treatment when exchanging annuities for long-term care insurance coverage is a significant component of protecting one's retirement savings and income.

The design and implementation of new products in this area is hampered, in part, by a continuing lack of tax guidance. Combination annuity-long-term care products are uniquely important in providing Americans with more solutions to their long-term care needs, and guidance still is needed to implement the policy of §844 of the Pension Protection Act.

F. The Generation Skipping Transfer Tax (GSTT) Withholding Obligation on Insurance Companies Should Be Eliminated

The current withholding requirement imposed on issuers of life insurance policies and annuity contracts is unduly burdensome and should be eliminated.

Under Example 5 of current Treasury Regulation §26.2662-1(c)(2)(vi), all life insurance policies and annuity contracts issued in the ordinary course of business are treated as “trust arrangements” for purposes of the GSTT. In those instances where the aggregate proceeds payable from those policies exceeds $250,000 and those proceeds are payable to individuals or trusts that are defined as “skip persons” for purposes of the GSTT, the insurance company is subject to a withholding obligation. The current regulation imposes this withholding obligation on the insurance company even though (1) the insurance company has only a contractual relationship with the policy owner and the designated beneficiaries, (2) the insurance company is neither a trustee nor personal representative of the deceased policy owner or the insured, and (3) the insurance company does not have, and cannot easily obtain, the information that is needed to accurately determine whether the designated beneficiaries are “skip persons” for purposes of the GSTT.

Whether an individual beneficiary or trust is defined as a “skip person” for purposes of the GSTT is dependent upon the application of complicated generation assignment rules that are set forth in Chapter 13 of the Internal Revenue Code. The application of those rules requires facts that are not collected and maintained in the usual course of an insurance company's operations and are facts that often cannot be readily and accurately obtained by the company. The facts needed include the familial relationship of the policy owner to each beneficiary having an interest in the proceeds. Intricate facts involving the blood line, adoptive, and marital relationships among the decedent and the various beneficiaries unknown to the insurer are implicated.⁴ Because the application of the GSTT depends upon an analysis of that type of information, the requirement of this portion of the regulation is impossible to consistently and accurately administer without collecting and verifying personal information that is not readily accessible to the life insurance company. Gathering and verifying such information from the various beneficiaries (a task performed by a decedent's personal representative or trustee) requires time consuming back-and-forth communications that unnecessarily delay the payment of claims by the company, frustrate beneficiaries, and rarely result in any actual withholding.

If not entirely withdrawn, we believe that the withholding obligation under this regulation should be modified to relieve the insurance company of any withholding obligation unless the cumulative policy values transferred by the company to skip persons exceed the value of the federal GSTT exemption applicable in the year of the policy owner's date of death. Since no federal generation-skipping transfer tax liability attaches until the cumulative value of all transfers subject to the tax by any one individual exceeds the individual's exemption from that tax ($11.4 million for decedents dying in 2019), the tax rarely applies, further making the compliance burden imposed by the current regulation grossly disproportionate to any benefit it may serve.

* * *

We appreciate your time on, and attention to, these recommendations for the 2019-2020 PGP. We welcome the opportunity to discuss our recommendations and to work with you on these issues in the coming months.

Sincerely,

Regina Rose

Mandana Parsazad
American Council of Life Insurers
Washington, DC