KCI Tax Interpretation

Transcription

1 KCI Koehler Consulting, Inc. KCI Tax Interpretation Variable, Universal, and Traditional Life Products January 27, 2017 Table of Contents Only

2 TABLE OF CONTENTS INTRODUCTION PRODUCTS BUSINESS EVENTS EVENT TYPES INTERNAL REVENUE CODE SECTIONS CSO MORTALITY TABLES TAX TESTING SEQUENCE DESCRIPTION DETAILED SPECIFICATIONS General rule Testing Sequence SECTION 72(E) BACKGROUND DESCRIPTION FLOW OF MONEY IN AN INSURANCE CONTRACT COST BASIS DESCRIPTION INTENT DETAILED SPECIFICATIONS Cost Basis Impacts Interest Sensitive Contracts Charges Sales Load / Premium Tax Examples: Disability Waiver Waived Charges - Insufficient Fund Value Monthly Processing s Impact on Cost Basis Charges assessed on partial surrenders and/or withdrawals Cost Basis for Traditional Life contracts ACCOUNTS ACCUMULATION ACCOUNT INTEREST PAID ON LATE PREMIUM UNAPPLIED DIVIDEND ACCOUNT UNEARNED PREMIUM ACCOUNT UNAPPLIED PREMIUM ACCOUNT SUSPENSE ACCOUNT TAX INTERPRETATION FOR ACCOUNTS REFERENCES DIVIDENDS DESCRIPTION I.R.C REFERENCE DETAILED SPECIFICATIONS

3 Dividends Paid Example Dividend Options Examples: TAXABLE GAINS DESCRIPTION INTENT DETAILED SPECIFICATIONS Cost Basis Cash Surrender Value Cash surrender value Traditional Life Gain Distributions Subject to Taxation Tax Events Taxable Gain Procedure Cost Recovery Method (FIFO) Gain First Method (LIFO) Cash rich contracts (7702(f)) Recapture Ceiling Rules Loans Settlement Options Taxable Gain Summary Cost basis adjustment Relationship to TAMRA Testing % Pre-mature Distribution penalty REFERENCES WITHHOLDINGS DESCRIPTION DETAILED SPECIFICATIONS Overview Detailed Processing Logic Federal Withholding YTD State Withholdings State Withholding Example Reportable Payment Contract Owner s TIN Missing TIN When to Withhold Amount to Withhold Suggested Amount FILING REQUIREMENTS DESCRIPTION DETAILED SPECIFICATIONS R Sample 1099-R Tax Reporting Year Distribution Code Aggregated Entries Multiple 1099s for One Business Event END OF YEAR TAX REPORTING BACKGROUND DETAILED SPECIFICATIONS End of Year

4 Examples, from the database perspective Example 1 Taxable event detected which spans tax years Example 2 Taxable event reversed, spanning tax years Subsequent correction Conversion Additional System Behavior KCI Tax Server Logic Additional KCI Tax Server Fields KCI Tax Server Parameters Alerts DEFRA DESCRIPTION INTENT DETAILED SPECIFICATIONS REFERENCES GUIDELINE PREMIUM TESTING DESCRIPTION INTENT DETAILED SPECIFICATIONS When Testing Is Performed Grandfather Status Guideline Single Premium Guideline Level Premium Cash Value Corridor Qualified Additional Benefits Premiums Paid Amounts Paid into the Contract Anatomy of a Guideline Premium Mortality Charges Level Death Benefits Variable Death Benefits Substandard Charges Expense Charges Adjustments Old Expense Charges, Old QAB Charges, Old Rating Charges New Expense Charges, New QAB Charges, New Rating Charges Present Value of the Old Level Death Benefit Present Value of the Old Variable Death Benefit For normal Base Policy type contracts with possibly insured term riders Present Value of the New Level Death Benefit For normal Base Policy type contracts with possibly insured term riders Present Value of the New Variable Death Benefit For normal Base Policy type contracts with possibly insured term riders For complex Base Policy type contracts (Total Sum Insured) Present Value of Old Expense Charges, Old QAB Charges, Old Rating Charges Level Death Benefit Option Contracts Present Value of New Expense Charges, New QAB Charges, New Rating Charges Level Death Benefit Option Contracts Guideline Level Premium Adjustment Example for Level Death Benefit Option The Numerator The Denominator The New Guideline Level Premium Death Benefit Option Changes Necessary Premium for Guideline Tested Products

5 Level Term Riders Non-Level Term Rider Decreasing Term Non-Level Term Riders - Increasing, PCRR, etc Approach to Guideline Premium Calculations Projection Data Requirements for Adjustments Projection Data Examples Qualified Additional Benefits Spouse Level Term Rider Off-Anniversary Adjustments Guideline Premium Calculation Tables for formula driven contracts Actuarial Values Used in the Formulas Determination of Rider and Rating Charges Procedures for Handling DEFRA Failures Guideline Level Premium Calculation at Issue Example Assemble the Guideline Premium Less than Target Guideline Single Premium Calculation at Issue another Example Assemble the Guideline Single Premium Guideline Single Premium Calculation at Issue Example Assemble the Guideline Single Premium DATA REQUIREMENTS Tax Message, Tax Reply Message, Tax Database REFERENCES CASH VALUE ACCUMULATION TESTING DESCRIPTION INTENT DETAILED SPECIFICATIONS Timing of Tests Cash Value Accumulation Test IRC DEFRA Death Benefit Death Benefit Factor Cash Surrender Value DEFRA Death Benefit Under the Contract Total DEFRA Death Benefit Under the Contract Corridor Death Benefit Under the Contract DEFRA Death Benefit Total DEFRA Death Benefit Example 1: DEFRA Issues REFERENCES RECAPTURE CEILING (F)(7) DESCRIPTION INTENT DETAILED SPECIFICATIONS Applicable Period Cash Surrender Value DEFRA Net Single Premium Total DEFRA Death Benefit Maximum Cash Surrender Value (a.k.a. GPT Cash Value Corridor) For Guideline Tested policies, the rules are: Taxable Amount under Recapture Ceiling Rules Effect on Other Attributes Examples: REFERENCES TAMRA

6 BACKGROUND DESCRIPTION INTENT DETAILED SPECIFICATIONS Testing Sequence REFERENCES MEC CLASSIFICATION DESCRIPTION DETAILED SPECIFICATIONS Revocable v. Irrevocable Removal of excess MEC Status Reversal Two Year Lookback MEC Aggregation TWO YEAR LOOKBACK BACKGROUND DESCRIPTION INTENT DETAILED SPECIFICATIONS Recharacterization Period Recharacterization Procedure Going Forward PAY TEST DESCRIPTION INTENT DETAILED SPECIFICATIONS Pay Testing Period Business Events to Test Pay Test Accumulated 7-Pay Premiums Pay Premium TAMRA Death Benefits Pay Premium for Death Benefits Pay Premium Factor Factor Determination Pay Premium Factor - Calculated TAMRA Low Death Benefit TAMRA Death Benefit Substandard Credit for the Death Benefits Qualified Additional Benefits (QAB Credits) Off-Anniversary Material Changes QABs to Include Pay Annuity Factor Other Additional Benefits Pay Premium Calculation After a Material Change Pay Annuitized Cash Value Pay Premium Calculation After an Incoming 1035 Exchange Pay Premium Adjustment Accumulated Amounts Paid Amounts Paid Contract Component Premiums Paid Issues Transaction Processing

7 REFERENCES REDUCTION TESTING DESCRIPTION INTENT DETAILED SPECIFICATIONS What can cause a reduction? When is testing performed? Determining if a reduction in benefits has occurred Re-computation requirements if a reduction in benefits has occurred Deemed Cash Surrender Value Re-testing Necessary Premium Testing / Updating MEC classification Examples INFORMATION REQUIREMENTS REFERENCES MATERIAL CHANGES DESCRIPTION INTENT DETAILED SPECIFICATIONS Material Change Detection Deemed Material Changes Material Changes for Traditional Life Tested Material Changes Not Material Changes Material Changes and MEC Classification Timing of Tests Treatment of Grandfathered Contracts REFERENCES NECESSARY PREMIUM TESTING DESCRIPTION INTENT DETAILED SPECIFICATIONS When does a Material Change Occur? What happens after a Necessary Premium Testing induced Material Change? Benefit Increase When is testing performed? Material Change Change Impact Unnecessary Premium Unnecessary Premium For a Cash Value Accumulation Tested Product Net Premium Net Premium for Traditional Life Maximum Necessary Premium Net Single Premium Net Single Premium Traditional Life Net Single Premium for a Test Year Net Single Premium for the Lowest Death Benefit for a Test Year Net Single Premium for the Present Value of the Future QAB Charges for a Test Year Net Single Premium for the Present Value of the Future QAB Premiums for a Test Year Net Single Premium Factor Deemed Cash Surrender Value Variable Products Shadow Contracts Shadow contracts

8 Deemed Cash Value / Shadow Contract Updating Deposits Premium Deposit Charges Withdrawals Applicable Mortality and Expense Charges Monthly Mortality and Expense Charges Net Deemed Cash Value Annual Interest Rate Guaranteed Cost of Insurance Charges Deemed Cash Value Net Amount at Risk Timing of Transactions for Deemed Cash Value Deemed Cash Surrender Value Example Deemed Cash Surrender Value Traditional Life Deemed Cash Value / Shadow Contract Updating Traditional Life Net Necessary Premium Net Unnecessary Premium Gross Unnecessary Premium Example Impact of Reductions and Other Adjustments Reductions / adjustments for non-linear charges Deemed Cash Value Adjustments when the Lowest Death Benefit or a QAB is Reduced on Traditional Contracts Deemed Cash Value Adjustments when a QAB is Reduced on Traditional Contracts Material changes on Traditional Life Contacts Deemed Cash Value Adjustments upon a Material Change Calculation of Attained Age when a Material Change Occurs Material Change due to the Payment of an Unnecessary Premium Information Requirements Traditional Life Example GRANDFATHER TESTING - TAMRA DESCRIPTION INTENT DETAILED SPECIFICATIONS Date Entered Into Loss of TAMRA Grandfathering $150,000 Rule Applicable Death Benefit Grandfather Testing REFERENCES EXCHANGES - INCOMING DESCRIPTION INTENT DETAILED SPECIFICATIONS Incoming 1035 At Issue Subsequent transactions payment window acceptance test Premium Payment Cost Basis Carryover Cash Value Carryover TAMRA MEC Status Carryover Mirrored Loan Cost basis / MEC Status updating after the payment has been processed Information required EXCHANGES - OUTGOING

9 DESCRIPTION INTENT DETAILED SPECIFICATIONS Tax System Processing of the Old Policy Exchange of a Policy with an Outstanding Loan Cash Value Carryover Previous Distributions TRANSACTION CONSIDERATIONS DESCRIPTION DETAILED SPECIFICATIONS Tax Events Non-Tax Events Special transactions Transaction Timing Premium Payments Advanced discount payments Other payments Payments for Paid up insurance Premiums paid by dividends Examples Payment reversal Transaction Granularity SETTLEMENT OPTIONS DESCRIPTION SETTLEMENT OPTIONS SETTLEMENT DIVIDENDS EVENT AMOUNT APPENDICES GLOSSARY ERRORS & ALERTS KCI TAX SERVER ALERTS REFERENCES