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Proposed regulations address life insurance reserves

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April 2020


Treasury and the IRS, on April 2, published proposed regulations under Section 807, addressing changes to the computation and reporting of life insurance reserves that resulted from the 2017 tax reform act (the Act). Although the regulations may not impose a significant burden, or substantially change the rules in the short term, the regulations will be impactful in the long term as the IRS develops new issues in examination and implements new reporting requirements.

The takeaway

At first blush, the effect of the proposed regulations may strike insurance companies as modest. The exclusion of asset adequacy reserves from deductible life insurance reserves is not new. The procedures for changes in basis for computing reserves already are provided in Rev. Proc. 2019-10. Reporting required for life insurance reserves, and separate account items, is authorized by the regulations, but not set forth with specificity. The obsolescence of many regulations and rulings under prior law already is known. At the same time, the proposed regulations include helpful clarifications, particularly concerning the status of GPV reserves as tax-deductible reserves, netting of Section 481(a) adjustments, and the treatment of a company whose status changes from a life to a nonlife insurance company.

The regulations raise a number of issues for further consideration. If not addressed in final regulations, these issues could arise in examination, or be addressed in other guidance:

  • What future reporting requirements will apply for reserves and separate account items? How burdensome will they be, and how useful to the government?
  • What is the practical significance of defining asset adequacy reserves by identifying items that are ‘included,’ rather than simply by referring to the Valuation Manual, which defines asset adequacy for statutory accounting purposes?
  • What is the reason for asserting that changes in basis of computing reserves are subject to the rules of Section 446(e) when this previously was not the case?
  • What is the appropriate treatment of foreign-issued contracts under provisions on which the preamble requests comments?

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Julie Goosman

Insurance Tax Leader, PwC US

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