Industry groups are responding to recent guidance from the Internal Revenue Service on how to reserve for variable annuities with guaranteed benefits for tax purposes.
On March 25, the IRS issued Notice 2010-29 providing interim guidance on Actuarial Guideline 43 which was fully affirmed by the National Association of Insurance Commissioners, Kansas City, Mo.
AG 43 affects contracts issued on or after Dec. 31, 2009. The IRS ruling states that “Generally, AG 43 requires that the aggregate reserve for contracts falling within its scope equal the Conditional Tail Expectation Amount (the “CTE Amount”)1 but not be less than the Standard Scenario Amount.“
The American Council of Life Insurers, Washington, issued the following statement:
“Notice 2010-29 set forth partial guidance on the way in which life insurance companies should implement, for tax purposes, basic reserving for variable contracts under AG 43. The guidance is in line with what was expected, and the industry is pleased with the result as far as it goes. The IRS left some issues open, which was also expected, and we look forward to working with the IRS and the Treasury Department on addressing those issues.”
The American Academy of Actuaries, Washington, through Tom Campbell and Barbara Gold, co-chairs of its Life Practice Council, offered the following points:
--“The Academy Life Practice Council continues to appreciate Treasury’s willingness to provide guidance on calculating VA-CARVM tax reserves. The Academy Life Practice Council has recently appointed a working group to consider making comments to the Treasury regarding Notice 2010-29.
--A representative of the Academy Life Practice Council has met with Treasury in the past on principle-based reserves and the Academy Life Practice Council responded to the Treasury’s request for comments to Notice 2008-18 nearly two years ago. (Notice 2008-18, published on Feb. 4, 2008, described two reserve methodologies under way at the NAIC—a principles-based approach and AG 43. It also alerted life insurers to possible federal tax issues.)
--For those areas where Treasury has provided guidance in Notice 2010-29, our initial belief is that the guidance in the recent notice is fundamentally consistent with the Academy Life Practice Council’s views expressed in our comments to Notice 2008-18.
--There are still areas of uncertainty that need to be addressed, including the inclusion of the stochastic reserve in the statutory reserve limitation on the tax reserves. The Academy work group is preparing comments on this treatment and other areas of uncertainty not clearly addressed in Notice 2010-29.”
The Standard Scenario, a minimum reserve included in AG 43, plays an important role in the IRS guidance. The Notice states that “The Standard Scenario Amount determined under AG 43 will be treated as a life insurance reserve for Federal income tax purposes if the requirements of that guideline, including the account value return assumptions, are met.”
Companies which are given permission to delay implementation of AG 43 by an insurance commissioner must do so consistently and does not affect the amount of the reserve that must be established.
And, if the reserve determined under AG 43 differs from the amount if AG 43 was not used, it must be spread over 10 taxable years. If a delay is granted, it must consistently delay implementation of the 10-year spread.