By Allison Bell | September 10, 2020 at 02:19 PM
The regulations could eventually affect what life and annuity
products cost, and how profitable they are.
The Internal Revenue Service — an arm of the U.S. Treasury
Department — has completed work on two documents that might, or might
not, increase U.S. life insurance companies’ federal income taxes.
One document is a set of final regulations, “Computation and
Reporting of Reserves for Life Insurance Companies.” The IRS is in the process
of putting the regulations into effect, by getting the regulations published in
the Federal Register.
The regulations affect what happens to life insurers’ income
taxes when the insurers change the methods they use to account for the reserves
supporting life insurance benefits obligations, annuity benefits obligations,
and other obligations.
The other document, IRS Revenue Ruling 2020-19, governs when a
reserving change a life insurer makes is significant enough to count as a
“change in basis” for income tax calculation purposes. That document is
supposed to help life insurers apply the new final reserve computation and
reporting regulations.
Resources
·
A
preliminary version of the new IRS final regulations is available here.
·
A
copy of IRS Revenue Ruling 2020-19 is available here.
·
An
article about y is available here.
The IRS developed the new regulations and the revenue ruling to
implement the current version of Section 807(f) of the Internal Revenue Code
(IRC).
Congress updated IRC Section 807(f) when it passed the Tax Cuts
and Jobs Act of 2017 (TCJA). The TCJA drafters tried to pay for some of the tax
cuts in the legislation by including Section 13513, which deals with how life
insurers include the effects of reserve computation changes in their tax
returns.
The Joint Committee on Taxation predicted in November 2017 that
a version of the life reserve tax rule change it reviewed could bring in about
$1.3 billion in extra tax revenue over 10 years, or an average of $130 million
per year. Life insurers spent a total of about $11 billion on income
taxes in 2017, according to the American Council of Life
Insurers.
The actual income tax impact could be different from the
estimate. Life insurers could end up including any impact in the cost of life
and annuity products, or in product features, or they could let any change in
tax payments flow through to their earnings.
IRS regulations treat a change in the “basis of computing” some
items relevant to life insurance company income taxes as change in accounting
methods, and a life insurer must get permission from the IRS secretary to make
that kind of change in basis, IRS officials write in the preamble, or
official introduction, to the new final regulations.
One part of the new regulations could create a gap between what
the IRS classifies as a life insurer’s reserves and what state insurance
regulators see as an acceptable level of reserves, officials say.
Under rules developed by the National Association of Insurance
Commissioners, states may ask life insurers to add “asset adequacy” reserves
for products, to make sure that the insurers can make good on benefits promises
to the holders of products facing challenges, such as low investment returns or
high claim costs.
The new regulations provide that “that no asset adequacy reserve
may be included in the amount of life insurance reserves” included in the
accounting change impact calculations, IRS officials say in the preamble.
Officials say one commenter “took the position that a change in
basis of computing an item referred to in [IRC} Section 807(c) is not a change
in method of accounting that should require consent” from the IRS commissioner.
“The Treasury Department and the IRS do not agree with this
position,” IRS officials say. “The computation of reserves has always been a
method of accounting.”
The IRS lists Ian Follansbee as a contact person both for the
final regulations and for the revenue ruling.
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